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Craton Barreling Ahead

by Richard T. Stuebi

Being a senior advisor to the firm, I attended last week’s annual meeting of Craton Equity Partners, a cleantech private equity fund manager based in Los Angeles.

While cleantech in its focus, Craton doesn’t take on much technology risk. Rather, Craton generally invests in companies that have largely proven their technologies – or frankly don’t rely much on proprietary technologies – and are already generating substantial revenues, requiring growth capital to build out their business models into sizable scale.

This was illustrated by the stories told by three of Craton’s portfolio companies:

  • Propel Fuels, which is developing a critical mass of biofuel retailing locations – by leasing space at existing gas stations, installing necessary equipment for biofuels, managing fuel delivery logistics, and retail marketing via co-branding – across California, with a view towards replicating this model in other geographic markets in the U.S.
  • Petra Solar, which has standardized a photovoltaic product for installation on power poles, thereby enabling utilities to meet renewable portfolio standard requirements while also improving the quality and management of power throughout their distribution grids.
  • GreenWave Reality, which is aiming to extend the smart-grid “beyond the meter” and into the home, via a centralized radio-broadcasting gateway at the service entrance and a variety of intelligence-enabled radio-controlled applications throughout the home to manage energy usage.

Along with these three presentations by portfolio company CEOs, the Craton senior partners provided their perspective on the state of the cleantech investment markets.

Of note, the Craton partners believe that the collapse of the credit markets over the past few years has yielded good opportunities for its fund to invest equity in companies – some of whom are generating tens of millions of dollars of revenues, and already profitable – that really ought to have been able to secure debt during more normal times, thereby generating attractive risk-return profiles upon which Craton could capitalize. Clearly, Craton was fortunate to have been focused on later-stage private equity opportunities, rather than earlier-stage venture capital opportunities, where the credit crunch has provided no such opening.

The recent addition of Kevin Wall to the Craton team, possessing significant high-level contacts around the world, reflects Craton’s view that many of the best growth and exit possibilities for cleantech in the coming years will occur internationally. This is a sad but entirely legitimate commentary on the state of the U.S. cleantech marketplace: if you want to really do well in cleantech investing in the next several years, you’re going to have to focus a lot of attention overseas.

Consistent with my personal experience, the Craton team noted that the key success factor for their portfolio companies continues to be management quality. Fortunately, they are seeing (as I am) an influx into cleantech of a greater quantity of better talent in the past few years. Of course, this is in part driven by deteriorating economic conditions and opportunities in other sectors of the economy. But, I also sense it’s because many capable people are increasingly drawn to cleantech for other intangible attractions. (I was recently on the phone with an old friend of mine who made a lot of money in real estate and didn’t find it challenging enough – so he’s moving into cleantech. Five years from now, I’m sure this friend of mine will not complain that making money in cleantech wasn’t sufficiently challenging!)

On the whole, it appears that Craton’s first fund is doing generally well, and the firm is beginning to prepare for raising its second fund. The question will be whether Craton’s good performance on paper (no liquidity events yet) will be able to overcome a very tough fund-raising environment. Given their strong relationships in the California marketplace – where cleantech has the most traction of anywhere in the U.S. – Craton’s progress in the coming 12-24 months will be a good barometer of the health of the cleantech investing thesis in the U.S.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

Australia the untapped market – new report on Australian Cleantech investment activity

by Nick Bruse

A new report co-authored by the Cleantech Network and Cleantech Ventures will be released today that details the PE & VC investment occuring in Australian cleantech companies.

At the launch breakfast this morning we heard from Jan Dekker (CV) and Anastasia O’Rourke (CN) present the key findings of the study. I’ve summarised some of these below, but you can download the full report from the Cleantech Ventures website.

Key findings

  • A$540m of venture capital dollars invested from 1999-2007
  • 174 rounds in 75 companies
  • Around 3% of total VC invested
  • 66 IPOs between 1974-2006 and 24 in 2005-06 alone

The Cleantech space in Australia is becoming more and more interesting as international and domestic investors are realising that Australian cleantech investment opportunities are relatively untapped, compared with the rest of the world.

Key drivers that are seeing a growth in the sector in Australia are:

  • commodity boom increasing economic activity
  • technology readiness from research institutions
  • environmental pressures including water shortages and climate change impacts
  • increasing policy push as a result of upcoming election
  • strong media interest in the sector
  • increasing capital availability

However there still remains some challenges for Australian Cleantech including:

  • lack of early stage capital
  • more technology transfer to business required from Australian University and Research institutions
  • more corporate venture funds and company investment & engagement required
  • stronger policy particularly around Mandatory Renewable Energy Targets, emissions trading and Kyoto
  • better analyst coverage of listed companies

By way of reference Cleantech Ventures has screened around 450 companies and made 11 investments via its CEGT fund over the last 4 years. In October this year Cleantech Ventures announced it has completed the first close of its new Cleantech Australia Fund.

The fund’s first closing of $50 million is made up of $20 million provided through the Australian government’s Innovation Investment Fund (IIF) program and $30 million from VicSuper, a superannuation fund committed to sustainability.

Article posted from The Cleantech Show


Nick Bruse is runs Strike Consulting, a growth venture consultancy specialising in the cleantech sector and hosts The Cleantech Show, a weekly podcast of interviews with leaders involved in clean technology research, entrepreneurship, commentary and investment.

Cleantech Venture Capital – Still Rising

As part of our ongoing series on stories on investment in the cleantech sector, we had a chance to discuss the sector with one of the venture capitalists at Emerald Technology Ventures.

Scott MacDonald is an Investment Director with Emerald Technology Ventures, a global leader in cleantech venture capital. Founded in 2000 under the name SAM Private Equity, Emerald is a pioneer in this rapidly emerging sector and is focused on innovative technologies in energy, materials and water. With offices in Zurich, Switzerland and Montreal, Canada, Emerald manages three venture capital funds and two venture capital portfolio mandates totaling over US$380 million. Scott currently serves as Chairman of RuggedCom and as a Director of Solicore and SoftSwitching Technologies. Prior to joining SAM, Scott held the position of Managing Director at OPG Ventures Inc., the venture capital subsidiary of Ontario Power Generation. Previous to OPG Ventures, Scott worked for ACF Equity, an early-stage venture capital company focused on investing in information technology companies. Scott graduated with a Bachelors degree from McMaster University and an MBA from Dalhousie University. He is a member of the North American Advisory Committee of the CleanTech Venture Network.

I know a bit about the history of SAM and Emerald Technology Ventures, and as one of the oldest cross-border investment groups in the cleantech area, I am very curious to get the Emerald Technology take on a number of issues. So we put to Scott a few thoughts and questions to get their take:

Emerald sponsored the San Francisco GreenVest 2007 conference I am chairing in June, and you are speaking there – can you share a few of your insights on the future of the cleantech area as an investment asset class?

I think we are in the early days but there is certainly an element of notoriety that the sector has attracted over the past 12 months with scientists, politicians and venerable VCs claiming action is required now to save the planet from global warming. A reputable and experienced LP in the venture asset class told me just last week that every generalist fund they speak with mentions an initative in cleantech. I think the great generalist funds will invest in the sector (as you know a few already are) and they will likely be successful. The specialist funds like Emerald will continue to map out and invest in innovating technologies because of our technical expertise and experience. Based on a number of successes exits to date in our first funds (Evergreen, Schmack Biogas, Pemeas), the specialization strategy seems to be working well. A really exciting development is that we are starting to see repeat entrepreneurs. Cleantech entrepreneurs that have successfully exited and are looking to try it again – and we couldn’t be happier. This was a key factor in the growth of the IT sector in the late 80s and 90s.

And can you fill me in a bit on the ins and outs of the recent fund history – the mandates with CDP and Ontario Power, your fund raise last year, and the subsequent MBO to form Emerald?

In 2000, SAM Group (Sustainable Asset Management), a leading asset management company specializing in sustainability investments and headquartered in Zurich, launched SAM Private Equity as its venture capital arm. That same year SAM Private Equity closed the SAM Sustainability Private Equity Fund and the SAM Private Equity Energy Fund with a combined EUR 90 million in commitments from leading institutions and strategic corporations. Both of these first funds are fully invested. In 2004, SAM Private Equity was awarded the portfolio management mandate from la Caisse de Dépot et Placement du Québec (CDP), a large Canadian-based pension fund, to manage its direct energy technology venture capital portfolio. Following the awarding of this mandate, SAM Private Equity increased its North American presence with two former members of the CDP team and established a North American office in Montreal, Quebec. In 2005, SAM Private Equity was awarded its second portfolio management mandate from Ontario Power Generation, a large Canadian electric utility, to manage its direct energy technology venture capital portfolio. To further strengthen its North American investment focus, two members of the former venture capital arm of Ontario Power also joined the team.

In March we announced the final close of our latest cleantech focused venture fund with commitments of EUR 135 million (US$180 million). We are going through a name change but the fund will be renamed Emerald Technology Ventures Fund II. Strong investor demand helped us exceed our original target for the new fund of EUR 100 million. Investors in the new fund are leading investment companies, financial institutions and multinational corporations from around the globe including: GIMV – Belgium, Rabobank – Netherlands, Caisse de dépôt et placement du Québec – Canada, Axpo Holding – Switzerland, Springbridge Limited (Advised by Consensus Business Group – UK), Credit Suisse – Switzerland, Deere & Company – USA, DSM Venturing – Netherlands, The Dow Chemical Company – USA, KPC Energy Ventures, Inc. – Kuwait, Piper Jaffray Private Capital – USA, Suncor Energy Inc. – Canada, Unilever Corporate Ventures and Volvo Technology Transfer AB – Sweden.

I have to ask, the name change – Sustainable Asset Management was an old brand in the cleantech investment sector, why the name change to Emerald?

Following the buy-out we are a private independent VC manager now and as such can no longer use the SAM brand. The SAM brand is powerful but it also was the source of some market confusion for our venture capital division. It’s clear now that Emerald is an agile and independent global VC manger with in-house expertise in the cleantech sector focused on investing exclusively in the cleantech sector and we have a new fund to do deals.

How many deals have you done from the new fund, how much capital have you employed, and what are you expecting to do over the next 12- 24 months?

We have made three investments out of the new fund and are closing on two more which should be announced within the month. We have only announced two of the investments to date – Vaperma and Identec (details of each is on our web site) www.emerald-ventures.com
I would expect we will invest in about 6 portfolio companies in total this year. We like to invest between US$2 -5 million in the first round depending on the opportunity and the stage. Technology, market and management are what’s important to us – we will consider all stages. Well…if it’s just a conceptual idea on a bar napkin we need to know the entrepreneur has made himself and others very wealthy in the past (preferably us – back to the serial entrepreneur comment).

What’s your passion these days? What technologies are you focused on?

I think there is an incredible opportunity for new technologies to help upgrade the antiquated electricity grids in Europe and North America and to leap frog into the incredible build-out that is going on in countries like India and China. China last year built an average of five 300 megawatt electricity plants a week and energy consumption is expected to continue rising fast as China aims to quadruple the size of its economy by 2020. This means a lot of new grid infrastructure technology will be deployed. We have a number of portfolio companies in the “smart Grid” space and will continue to seek out investments in this space.

You’ve had a couple of recent exits in fuel cells – what fund were they from, and has that changed your appetite for similar technology areas in the future?

We have had recent exits in this area: Pemeas which we sold to BASF and Cellex which we sold to Plug. We still have an number of other FC investments in our portfolio that we are bullish on – Angstrom Power and PolyFuel. I would say we have learned a lot about the general FC market and understand many of the technology challenges and market adoption risks much better. We are still interested in the FC space – I would just say we are a more sophisticated FC investor now.

What does Emerald see as the main differences between investing in cleantech in Europe versus the US?

The topic of an article in itself but quickly: Deal structure, Corporate governance model, Company history (many family business in Europe), labour laws, language, proximity and access to stock exchanges which are more accommodating to VC backed companies (Frankfurt Prime Standard, AIM), valuations (typically more favourable than the US – comparable to Canada where we are also very active). The short answer is lots but both regions provide great opportunity to generate investor returns. Again or investment thesis is based on the fact that unlike IT, cleantech is a global business and as such, investment opportunities are not limited to Silicon Valley or any other specific geography. At Emerald Technology Ventures we have taken a distinctive approach to addressing the challenges associated with technology specialization and geographic diversity. Our approach includes having technically competent people in-house and locating our Partners and Technology Specialists in two of the most important Cleantech markets in the world: North America and Europe.

We have done a lot of writing at Cleantech Blog on topics including ethanol, solar – so I’d like to get your 1 sentence rapid fire take on a couple of always topical cleantech investment debates:
– Thin film vs. Conventional PV – Thin film if you have deep pockets and patience
– Solar concentrators vs. Flat Panel – No comment, yet.
– Cellulosic vs. Corn Ethanol – Science project vs. commodity. I’m a VC…science project always wins.
– Cleantech vs. Greentech – Make great products, build great businesses and provide great returns to investors (and hopefully help out our world along the way) and no one will care what you call it.

Thanks Scott. Especially with those last comments, you’ve provided some good food for thought. The venture capital sector is built around high risk, high reward, and you guys are certainly in the mix. We continue to keep our fingers crossed that cleantech sector can deliver on the rewards side. You can find more on Emerald at www.emerald-ventures.com. And don’t forget to visit GreenVest on June 25 in San Francisco.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Author for Inside Greentech, and a Contributing Editor to Alt Energy Stocks.

What to Make of the TXU Deal?

by Richard T. Stuebi

Last weekend, TXU Corporation (NYSE: TXU) made the stunning announcement that it would be acquired by two private equity giants — Kohlberg Kravis Roberts (KKR) and Texas Pacific Group (TPG) — in a transaction valued at $45 billion.

Press release

Two things leap out at me from the announced deal.

First, the investors are willing to pay a 25% premium over the recent share price, while at the same time committing to a 10% rate reduction for TXU’s residential electricity customers in Texas. KKR and TPG are no dummies: it must mean that they truly think they can run TXU much more efficiently than it has been run — even though TXU has been widely viewed as a glowing success story since the meltdown of the merchant power markets in 2002. If a “good” utility TXU can be taken over by a private equity group at a premium price and earn the required rates of return on invested capital while cutting prices to customers, pretty much any electric utility should be in the same boat. Conclusion: there must be a lot of fat in the utility industry that can be cut with more aggressive management. If I were a large institutional investor in an underperforming utility, I’d be pressing the executives to dress the company up for sale. If I were a senior manager in the utility sector, I’d be expecting to be pushed to a much higher degree of performance for shareholders. If I were a mid-manager or lower level employee at a utility, I’d become increasingly worried about my job.

Second, the investors are the prime movers in axing 8 of 11 announced coal fired powerplants from TXU’s growth ambitions, in lieu of increasing expenditures on customer efficiency by $400 million. This will be a major reversal for John Wilder, TXU’s CEO, who has been loudly touting a vision for massive coal expansion. I’m certain that Wilder’s rich payday from this lucrative deal will help soften the blow to his ego, but it will be interesting to see how Wilder copes under his new owners. These are smart investors, and they seem to be saying that energy efficiency (along with renewables) is a much better investment than new coal fired powerplants — especially in a world with likely future carbon restrictions. This deal no doubt sends a signal that the capital markets are increasingly unwilling to make big bets on continued status quo in the utility industry. Wall Street is saying that the utility industry must change, and that it isn’t just going to keep dumping money into utilities that want to perpetuate the 20th Century.

Based on initial reports, it appears that there are few hurdles to the deal being closed, but I remain curious as to how KKR and TPG expect to monetize their $45 billion investment. It seems like there are three possibilities: simply holding the company and recouping returns via dividends from improved operations, flipping the company to another owner (or re-taking the company public) at a higher price, or breaking the company apart and selling the pieces to more natural owners. I’m sure they have thought through these possibilities in great detail, though it’s not obvious to me.

The examples of private equity attempting to earn attractive returns through investments in the U.S. electric utility sector have, to date, been not very successful. Let’s hope this deal works out for the investors. I’d love to see many more utilities bought by private equity firms and shaken up. I bet that many utility CEO’s and management teams wouldn’t last long under the reins of more aggressive owners. And, I’d bet we’d see better environmental performance from these historically lethargic companies. I hope the TXU deal is the beginning of a trend.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.