The case for investing in energy and environment

By Ian Thomas, Turquoise International

Businesses across the globe are increasingly acknowledging the strong potential offered by the clean energy and environmental sector, which has a critical role to play in boosting economic growth. Taking the UK as an example, at a time of recession when investment generally has been in decline, the environmental sector has been much more resilient. Employment across the industry and its supply chains continues to develop in sharp contrast to many more established business activities.

Of course, the picture is not entirely positive. A number of big investment projects have suffered due to inconsistencies in policy-making and a perceived lack of regulatory momentum. The size and diversity of the sector is both a blessing and a challenge, with focus shifting between technologies as they follow the political popularity cycle. For the clean energy and environment sectors to continue to make a consistent contribution to global recovery, it is important to provide a robust context for even greater investment decisions.

Internationally, parts of the renewables sector, for example Spanish wind and solar, are struggling whereas China continues to deploy huge amounts of capital as part of its long term economic planning. Political uncertainty in the US was reduced following the presidential election but has increased again as a result of the uncertainty over fiscal policy. Private sector investment in new technologies continues but at a reduced rate and investors’ appetite for risk has been curtailed.

Emerging trends

There has been a move away from renewable energy generation towards energy and materials efficiency. Technologies and projects that do not rely on public subsidy and instead generate payback from savings in fossil energy consumption are seen as lower risk. Investors are also avoiding technologies that have high capital intensity. The almost total lack of availability of bank debt for projects is a major issue, as well as reduced levels of risk capital for early stage investments from both financial and industrial investors.

Uncertainty over government support for renewable energy has had a significant effect on the direction of investment.Government indecision, for example the UK approach to solar and biomass, and changing regulation, such as the EU stance on biofuels, has delayed private sector investment.

Securing investment

Investors around the world continue to increase their exposure to companies that rate higher on environmental factors. At the same time, there is a common perception that many sustainable businesses have solutions to problems that either do not exist or which no-one will pay to solve. So what can businesses needing capital do to improve their chances of securing investment?

There is no one-size-fits-all approach. Clean energy and environment is not a uniform sector, more a series of overlapping industry segments of which only some are of interest to any individual investor. It is essential, therefore, to allow six months to get to a commitment (not the actual cash), which is why maintaining up to 12 months of operating runway is critical because of the time-consuming fundraising process.

Being realistic on valuation and allowing scope for new investors to achieve their (reasonable) return requirements is a price worth paying to avoid the risk of running out of funds.

Company owners should be mindful of the level of reward they are looking for. The risk they are prepared to assume in return will have a significant impact on strategy, fundraising and exit timing. At any point in time, shareholders should be able to answer the question: how much would I sell this company for right now or what will the position be in one or two years’ time? This is an issue often ignored.

Many companies do not have the luxury of choosing investors, but experience suggests small syndicates with diversity of approach, experience and connections work better than sole investors or large groups. Each will have an industry view and early understanding of their agenda will predict their behaviour once they are a part of the business. Experienced and pro-active investor board members can have a valuable role to play in this regard.

Investment structure (voting rights, liquidation preferences, etc.) should be appropriate to the particular circumstances of each investment but erring on the side of simplicity is often advisable. Agreements that constrain a business from taking normal commercial decisions without requiring board or shareholder input, or which allow individual shareholders disproportionate influence can lead to stalemate, often with disastrous consequences.

It is always prudent to engage an experienced adviser with a relevant track record who will add value across the board, including conducting due diligence, highlighting strengths and weaknesses and positing the questions investors will ask around projections and valuations. They can also improve business plan and investor presentation materials, reduce the burden on management and bring structure to the fundraising process, as well as play a significant role in reaching an acceptable deal.

Size matters – undersized businesses are often regarded as having unproven management teams, over reliance on fewer customers and insufficient market presence to withstand competition. In such circumstances, a company should consider opportunities to acquire or merge with other relevant businesses to rapidly scale up.

In the right circumstances, ‘playing hard to get’ can create competitive tension, a powerful means of achieving best value. This does not necessarily require the company to be put up for a public auction; instead not to jump into exclusivity with any investor until they have provided a detailed set of terms. Equally, don’t overplay your hand as that can result in a failed deal.

Finally, put yourself in the investor’s shoes; don’t assume that they have prior knowledge of your business and answer the questions they are asking, not those you think they should ask. Remember, they see lots of deals and you need to stand out from the crowd.

Looking ahead

The future needs for energy supply can only grow, the question is how quickly. However, the potential for surprising new developments, like shale oil and gas in the US, can have a significant impact on the supply/demand equation. There are a number of clean/renewable energy technologies, such as waste-to-energy, renewable chemistry/materials and automotive energy efficiency, that will reach maturity in the coming five to ten years and these may have a greater-than-expected positive impact.

Coal and gas will continue to supply a large proportion of primary energy generation because of growth in developing economies, like China and India, and the shale revolution. The role of nuclear is harder to predict but it is difficult to see how supply can be maintained without it. Renewables will grow but cannot make much of an impact globally in the near term. Achieving demand-side efficiencies is key.

The past decade has seen a transformation in how investment in businesses operating across these industries is viewed. Globally, commitment to funding these sectors is strengthening, driven by climate change and energy security concerns, the push for resource efficiency and the pure commercial benefits generated by new technologies. The next ten years are expected to offer genuinely exciting opportunities in many areas, particularly as investors extend their focus beyond wind and solar to other areas of energy and environment.

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About Turquoise International

Turquoise International is a merchant bank specialising in Energy and the Environment. Established in 2002, Turquoise offers in-depth industry knowledge and extensive capital raising, transaction advisory, and investment management expertise and track record.

For capital raising, our advisory clients are predominantly private companies or listed companies seeking funding via private placements across a range of business segments including technology, project development, manufacturing and services. Turquoise assists clients in raising funds across the capital structure including equity and debt. We source funds for our clients from a diverse range of investors located in Europe and internationally.

Turquoise advises corporate clients and their shareholders on transactions such as mergers, acquisitions, disposals and joint ventures assisting in areas such as strategy, identification of opportunities, valuation and transaction execution.

In fund management, Turquoise provides a range of services to investors, ranging from advice in relation to individual investments to discretionary investment management for a portfolio of investments. Turquoise invests directly through Turquoise Capital (seed stage proprietary investments) and manages the Low Carbon Innovation Fund.