Capital Returns to the Energy Sector

After an exhaustive analysis of the market in the last quarter of 2010, Cascadia asserted its belief that the financing market was coming back, even though that was not reflected in the market data at that time. This belief was validated over the last several months with $2.65 billion in venture capital and private equity being infused into the sustainability sector across 165 deals. The month of March alone saw $1 billion of financing. 

At the end of last year, the vast majority of funds were put to work in existing companies who had previously received institutional capital. This is indicative of a maturing industry and the trend is becoming more prevalent across the sustainable sector. 

There are several dominant trends within the market, leading to increased momentum in the energy sector. These include: 

1. Increase in single investments: Large growth equity and PE funds are increasingly comfortable putting more dollars to work in single investments in today’s market. Plasco Energy Group's $143 million financing represents a prime example of this trend.
2. Greater willingness by investors to accept risk: Investor appetite for risk has increased, but they prefer some types of risk more than others. Investors have demonstrated they are willing to take risk in terms of execution, scale up, and timing; however, they are less willing to take on technology or customer adoption risk.
3. Increased M&A activity: M&A transaction volume totaled $15.2 billion in Q1, almost doubling the $8.9 billion M&A transaction volume in Q4. Fortune 1000 corporations in a variety of industries including oil and gas, technology, industrial, power electronics, etc. will continue to actively look for acquisitions in the sustainability sector.

As the sustainable sector begins to mature, private equity funds and corporate investors comprise a larger percentage of investor activity. These groups see the growing opportunities and are eager to establish a foothold in the market. The business models of sustainable companies are becoming more clear, costs are decreasing with scale, and sustainable technologies are demonstrating that they can become profitable without government support.

One specific area of interest is the LED sector. Customer adoption of LED is occurring at a much faster rate than the previous couple of years. Consequently, many large corporations do not have the product line to meet the market’s demands. Rather than internally developing products, which could take 12-36 months, corporations are buying companies that have products that can be immediately implemented into their own distribution systems.

Solar was the top sector with invested capital in Q1 with $636 million and over 27 deals. The top investment recipients include companies such as BrightSource Energy with a $201 million investment, MiaSole with $106 million, and Alta Devices with a $72 million investment. According to global research firm Cleantech, investment came from 159 companies in North America, Europe, China and India.

That said, the biggest reduction in asset financing in terms of volume amount were in US wind and European Solar. The US slowdown reflected an acceleration of projects coming to market at the end of 2010 to qualify for the cash grant program. 2011 should show a similar profile of project financings picking up in the final quarter as wind projects try to meet the December cut off for tax credits. In Europe, the cancellation of solar feed in tariffs will significantly slow project development in this sector.

In terms of M&A transactions, there were several key deals in the sustainable sector during the first quarter. The largest and most notable was General Electric’s acquisition of Converteam Group for $3.2 billion. Converteam’s technology focuses on converters and grid interconnect equipment for solar and wind capabilities. It also specializes in permanent magnet generators and motors for wind turbines and propulsion systems. The Converteam deal adds numerous patents to General Electric’s already large wind portfolio, further strengthening the company’s position in this sector. 

Other substantial transactions in Q1 include, Schneider Electric’s acquisition of Summit Energy Services for $268 million, and geothermal developer Magna Energy and Putonic Power’s merger into a single renewable power producer named Alterra Power. Alterra’s post-deal market capitalization amounted to $575 million operating in geothermal, hydro, and wind. 

In summary, the first quarter paved the way for increased capital infusion into the energy sector for the remainder of 2011. With March being the most lucrative month, the numbers speak for themselves and display the confidence of investors after a down cycle in the market. Market watchers should keep their eyes on the most capital efficient, low risk companies as they will be the ones to receive funding and make headlines over the coming months.

Michael Butler is the Chairman and CEO of Cascadia Capital, a Seattle-based boutique investment bank that serves domestic and global clients. Butler leads the firm's Sustainable Industries practice.