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.
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.
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.