VC Forecast: $262 Billion in Global Renewables Market by 2013

The renewable energy market saw another record year of Venture Capital (VC) and Private Equity (PE) investment, with $18.1 billion invested in companies and projects in 2006. This is a 67% increase over the $10.8 billion invested in 2005, according to a new report released last week by the London based research and analysis firm, New Energy Finance.

The annual report, Cleaning Up 2007, examines these investment trends in 2006 and the first half of 2007—and identifies 1,859 investors who have either made investments or stated their intention to do so. The company recorded 193 funds that invest in clean energy, and analyzed 521 VC and PE deals in 2006, totaling $8.6 billion for companies and $9.5 billion for projects.

This trend has continued, with a total of $10.6 billion invested in the first half of 2007.

However, this rapid growth tells only half the story: during 2006, clean energy VCs invested only 73% of the total money available to them, with $2 billion residing in funds and waiting to be invested. This is a symptom of a market where demand for deals is higher than supply, which is driving up company valuations.

“2006 saw a modest amount of technology investment with increasing PE investment in later stage companies and more asset intensive sectors, such as wind and biofuels. Overall it was a good year. Although some company valuations are on the high side, a number of interesting companies are attracting investment. Investors’ appetite for clean energy continues to grow,” said Michael Liebreich, CEO and founder of New Energy Finance.

According to the report, all regions across the globe experienced significant growth in 2006. The Americas saw investment of $7.1 billion—an increase of 83% from 2005—as mainstream investors woke up to the opportunities in renewable energy, especially in biofuels. There was a 62% increase to $9.2 billion in funds invested in Europe, Middle East and Africa, mainly driven by PE investment in companies and projects.

Companies and projects in the Asia & Oceania region received $1.8 billion in investment, up 26%, driven by pre-IPO PE investments in Chinese solar companies and clean energy activity in countries such as India.

At a sector level, wind at $8.4 billion; biofuels at $4.7 billion; and solar at $2.3 billion attracted 86% of VC and PE investment between them. Mature technologies, such as onshore wind and first generation or corn-based ethanol, attracted PE money for expansion and roll-out of production capacity.

Solar raised a significant amount of money via the public markets, but also attracted the highest level of classic VC investment at $428 million—typically in thin film and non-crystalline silicon technologies. VC investment in second generation biofuels technologies, including cellulosic ethanol, also increased to $235 million.

Of the total VC & PE investment of $18.1 billion, 61% ($11.1 billion) represented new money into the renewable energy sector. The remaining money, $7 billion, was used to finance company buy-outs, and re-finance and acquire projects. Encouragingly the report noted the average VC deal size has increased in the past year at almost each development stage. Average series C/third round investment rose 29% to $14.8 million and average series D/fourth round deal size almost doubled to $20.7 million indicating investor confidence in companies with technologies closer to commercialization.

The highest concentration of VC/PE funded development stage companies is in the solar sector, accounting for almost 20% of all development stage VC/PE funded companies, followed by wind, demand-side efficiency, biofuels, and biomass & waste. These five sectors together account for almost 65% of all VC/PE funded companies. Of the 67 development stage companies known to be actively fundraising, 17 are within the solar sector, 13 in biofuels and 10 in demand-side efficiency.

New Energy Finance estimates that the total VC and PE invested in clean energy will grow at an annual compound rate of approximately 17% through 2013, during which time the company forecasts over $262 billion worth of VC and PE funded deals to be completed, absorbing over $146 billion of equity. The money will go to later stage deals, buy-outs and project financings, although the recent squeeze in the credit markets may slow down growth in some areas.
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