Two years ago cleantech, or green, investing was the strategy du jour. Today, industry expert and best-selling author Peter Fusaro explains that the industry is in a lull, though he still believes that investors can diversify their risk by investing in green funds.
Fusaro spoke with FINalternatives today about who is investing in green technologies, what sectors hold the most promise, and what hurdles the industry is facing.
What does the investment landscape look like in the cleantech sector? Is it as hot an investment prospect as it was two years ago?
No, it’s not as hot as it was. I believe we are in a pause, I think a lot of the funds and a lot of companies are figuring our how to survive, how to get the next round. The good news is that a lot of the C and D round funding is from government. So [the pause] is the bad news, but if you are smart you will stay in survival mode and hopefully capital markets will open up and more money will be invested, because frankly, a lot of these companies need to scale.
The other thing that is not well known in Silicon Valley is that a lot of this is energy project finance, so they need larger capital raises to actually implement technology. The tech sector knows energy management systems—smart grids, smart metering, all that kind of tech stuff—but now they’ve wandered into the energy space which is a $6 trillion capital intensive business, and they need substantially more money that the typical VC would look at.
For example, Kleiner Perkins has put together a $1 billion energy project finance fund, so I think there has been a lesson learned from Silicon Valley that this is a much more capital intensive industry, it isn’t tech only.
Who are the main investors in the sector now? Are hedge funds and private equity firms players?
What we have seen in the past year is several [cleantech] funds closing up and a lot of new ones launching.
The strategies that we are following are pretty much what we’ll see at the conference next week—carbon and emissions trading, long/short cleantech renewable energy equities, water and water rights, forestry (which is getting a lot of resonance and may get a lot more if the Senate bill comes through with offsets), and weather derivatives, which is still pretty small.
We are talking about a universe of 90 hedge funds. It’s not growing rapidly. Many of the funds I’ve visited with lost money due to Madoff—you wouldn’t think of it but let’s call it collateral damage. The good news is that they are in the sector, but there are only three $1 billion hedge funds in the clean/greentech sector. It’s not huge yet, but a lot of them have survived and the game now is raising assets under management. The problem is though that there is easier money out there in distressed assets, oil and gas, and more traditional fund strategies, and then you wander into this [green] sector which requires not just money and technology, but also government mandates. I think that is still a hurdle in the United States.
What about the sovereign wealth funds? Are they investing in the cleantech space?
No, they are not. They could, but the problem—and I’ve seen this with some of the larger banks—is the lack of knowledge capital of the sector. The alignment for project finance for the sector has been very simple, biofuels, PV solar or wind. And that feeds the project finance engine. So there is actually a dire need for more human capital in this sector to track all of these different strategies, which are not particularly well known.
One of the funds we are going to have at the conference is half public and half private. They [the managers] are basically two science majors. They know the physical chemistry and engineering of what they are looking at…So, you need technical knowledge [to manage a fund in this space], which is not the typical profile of a fund.
What sectors hold the most long-term promise?
I still think the emissions sector will have the best longer-term growth trajectory; unfortunately, the metrics are still very small. In U.S. last year carbon trading was $2.57 billion and globally it was $136 billion, most of that in the EU. So we are still tracking a very slow development. If you look five to 10 years out you will probably see this $2 trillion market that everyone has been talking about, but right now it is still pretty bumpy on getting the rules right: What’s going to happen post 2012 Kyoto? What’s going to happen in the EU? Etcetera.
I still think that the hardest sector is long-short, because of the 1,008 equities out there, it is very hard to analyze technology risk, operational risk, things that can go wrong in scaling little companies. And a lot of these listed companies probably never should have been listed, they should have been A or B rounds in venture capital land. So there is some disconnect.
Forestry is a very different sector. It is really an offset market. It is long term—a tree’s got to grow [laughs]. It is a very long-term strategy. I’ve been preaching ‘patient capital’ to many people in green. There is no quick buck, it is just too difficult to maneuver. People think the sector is dead, and it is not dead at all. It’s got a pulse, its going to come back. One good piece of news is that the U.S. this year will probably pass renewable energy standards, and that will harmonize 50 states on renewable energy credits.
I think the carbon market in the U.S. is getting battered by the cap and tax rhetoric, and unfortunately, that is ruling the day so I don’t think we’re going to see bigger upticks in the markets until about 2012 when California starts moving on carbon reductions. Federally, it will be a lot later.
There has been a lot in the press lately from climate change skeptics. Has that hurt the movement?
There has been an orchestrated campaign to denigrate climate change science, and a bunch of e-mails from a podunk university called East Anglia. To me it is ridiculous. If you talk to real scientists with real data—and I have been for 20 years—it is scary data. The models may be too conservative, frankly. And it is climate change, I never use the words ‘global warming.’ And if you start looking at this holistically, you start realizing that all of these issues really affect human health. So, if we addressed environmental issues properly we would reduce our healthcare costs, and that hasn’t been framed at all.
I think the whole [cap and trade] issue has been sold very poorly by the people who are in the know and the opposition has said, ok, we’re going to take over this issue and propagandize it. It is unfortunate, and for investors, they are shying away from the sector. I consult to private equity funds, and they are not in this sector. And that’s a lot of money and a lot of funds. Of 4,000 private equity funds in New York and 2,000 in the [San Francisco] Bay area, there is one that is green—Pegasus Capital Management. And the big dogs are not in the sector and they are not in the sector because of regulatory uncertainty.
So the bottom line is that you have a lot of fund strategies but frankly many of them have to scale and they are still small, so we are in the beginning of all this, still. But I still argue that green is a good asset class to diversify your risk.
About Peter Fusaro: Peter is the founder of of the Wall Street Green Trading Summit. In its 9th year, it will take place on March 23-24, 2010 in New York City. Peter is also the best selling author of "What Went Wrong at Enron" and is an energy industry thought leader noted for his keen insights in emerging energy and environmental markets. He co-founded the Energy Hedge Fund Center in 2004, as well as Global Change Associates in 1991, the latter which to focus on the interplay and convergence of energy and environmental financial markets.