3 questions to smart minds
Photo: A. Domin | WHEB Partnes

Investments in resource-efficient and sustainable technologies

For this 3 questions to A. Domin

WHEB Part­nes
Photo: A. Domin | WHEB Partnes
11. Febru­ary 2014

Sustainable invest­ments have expe­ri­en­ced a real boom in recent years. A resource-effi­ci­ent Europe is of great importance for compe­ti­ti­ve­ness and job crea­tion in Europe. In Germany and Europe, there are not many private equity or venture capi­tal funds specia­li­zing in invest­ments in energy- and resource-effi­ci­ent technologies.

For this 3 ques­ti­ons to Part­ner at WHEB Part­nes, Munich office

1. What are the special features of invest­ments in resource-effi­ci­ent and sustainable technologies?

Our invest­ment approach is based on the thesis that resour­ces of all kinds are beco­ming incre­asingly scarce and expen­sive. This applies to energy, but also to a wide variety of mate­ri­als or waste dispo­sal. Our port­fo­lio compa­nies offer solu­ti­ons in these areas: from energy-effi­ci­ent elec­tric drives for boats or energy-saving light­ing solu­ti­ons, to novel fiber compo­si­tes as wood substi­tu­tes, to light­weight cons­truc­tion solu­ti­ons for the auto­mo­tive indus­try. Although these compa­nies address clas­sic clean­tech issues, their success is based on the fact that they offer their custo­mers clear econo­mic added value. Products or services very rarely sell in large quan­ti­ties just because they are “green.” Although many large compa­nies like to proclaim that sustaina­bi­lity is an important part of their corpo­rate stra­tegy, in our expe­ri­ence purcha­sing still always acts accor­ding to purely econo­mic crite­ria. Thus, clean­tech compa­nies can only be successful if the solu­tion offe­red provi­des a direct econo­mic bene­fit to customers.

Howe­ver, sustainable tech­no­lo­gies can also be supported by legis­la­tion. Subsi­di­zing the solar indus­try is just one exam­ple here. In many count­ries, for exam­ple, taxes on land­fill dispo­sal have crea­ted a strong econo­mic incen­tive to dispose of waste in an envi­ron­men­tally sound manner. Another exam­ple is the recently imple­men­ted import bans on tropi­cal woods, which bring suita­ble alter­na­ti­ves such as Resysta even more into focus. When inves­t­ing in resource-effi­ci­ent tech­no­lo­gies, it is ther­e­fore important to under­stand the inter­play between market and long-term legis­la­tion in order to iden­tify successful compa­nies and support them in their growth.

2. They are part of the WHEB Group, which also invests in rene­wa­ble energy. How big is the Euro­pean market for this and how do you esti­mate its deve­lo­p­ment in the coming years?

In percen­tage terms, rene­wa­ble ener­gies conti­nue to grow the fastest world­wide, and this is very likely to conti­nue in the coming years. Howe­ver, invest­ments in Germany were held back by problems with grid expan­sion, delays in the expan­sion of wind farms and lower spen­ding on photo­vol­taics. Invest­ments in rene­wa­bles were around €15 billion in 2012, around 35% below 2011 levels, but the same trend applied across Europe: in 2011, €82 billion was inves­ted in rene­wa­bles, compared to €59 billion in 2012. Howe­ver, there are certainly inte­res­t­ing assets in this area: our sister company WHEB Infra­struc­ture is successfully inves­t­ing in project finan­cing for proven tech­no­lo­gies such as solar and wind farms and hydropower.

As private equity inves­tors, we clas­sify the rene­wa­ble energy sector as diffi­cult. In many cases, it takes signi­fi­cant invest­ment and time to get to cost struc­tures that are compe­ti­tive without govern­ment subsi­dies. Thus, many of the busi­ness models are ruled out for us, as they are neither capi­tal-effi­ci­ent nor imple­men­ta­ble within an accep­ta­ble time­frame. One excep­tion is our port­fo­lio company, Green Energy Group, which offers modu­lar and cost-effec­tive geother­mal systems. Here, we were able to win over a company that has a chance in global compe­ti­tion with large corpo­ra­ti­ons, both in terms of tech­no­logy and busi­ness model. In most other cases, the latter play­ers will proba­bly mostly prevail and expand.

3. There are only a handful of PE funds in Germany that have a simi­lar focus as WHEB Part­ners. To what do you attri­bute this, espe­ci­ally since the German govern­ment is heavily invol­ved in the alter­na­tive energy sector?

The German invest­ment market is marked by its history. As the VC scene deve­lo­ped in the septuage­na­rian 90s in this coun­try, the burs­t­ing of the dotcom bubble came shortly there­af­ter, caus­ing many play­ers to pull back. The tax frame­work in Germany is also known to be disad­van­ta­ge­ous for VC and PE funds compared to other count­ries, so that the scene is much smal­ler over­all compared to England or the USA. Ther­e­fore, the few play­ers mostly focus on proven invest­ment stra­te­gies such as ICT and bio/medtech. As an asset class, invest­ments in clean­tech have yet to prove that they can gene­rate corre­spon­ding returns. With the solar indus­try, there was also a bubble recently (fueled by German energy policy), which had very nega­tive conse­quen­ces for many inves­tors with nume­rous insol­ven­cies. Thus, there are indeed few “clean­tech” funds in Germany. Howe­ver, WHEB Part­ners’ invest­ments are also funda­men­tally in the clas­sic middle market: resource effi­ci­ency is just one of the crite­ria we use. The compa­nies must have strong growth oppor­tu­ni­ties (mostly driven by their focus on resource effi­ci­ency), be scalable, serve growing markets, and be led by strong teams. Through this ratio­nal approach, we believe we can show that invest­ments in German SMEs can be made very successfully through a special focus on resource efficiency.

In gene­ral, it can be said that invest­ments by many funds in clas­sic clean­tech themes have taken longer than expec­ted to reach full market matu­rity. After spec­ta­cu­lar succes­ses such as the sale of NEST to Google or the IPO of Tesla, inves­tors are once again incre­asingly turning to the clean­tech sector. There are also various funds specia­li­zing in clean­tech that invest in Germany from abroad. This proves to be diffi­cult, as German SMEs are criti­cal of the private equity indus­try, and a call from London or San Fran­cisco usually arou­ses even more mistrust. WHEB took the deli­be­rate step of opening a German office in Munich over 5 years ago: this gives us much better access to SMEs and their consul­tants. We expect that with an incre­asingly posi­tive return history, more funds will turn their atten­tion to resource-effi­ci­ent tech­no­lo­gies, and more capi­tal will be available for clean­tech in Germany in the medium term.

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