Venture Capital in Europe

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Day two of the European Future Energy Forum in London and today I wanted to get a sense of the state of venture capital investment in cleantech and renewables in Europe. Specifically, how does it compare to the U.S?

Before he took the stage for a panel discussion titled “Low Carbon Financing in Europe—State of Play” I caught up with Alexander O’Cinneide, the Irishman who heads Masdar Capital, the private equity/venture capital arm of the Abu Dhabi-backed company Masdar.

Ecocentric: What is the state of play for VC investment in Europe at the moment? How does it compare to the U.S.?
In general, Europe has traditionally had less capital available than the U.S. for cleantech and renewables. There were probably more deals done in the States this year than in Europe. But from an investor perspective there are probably better opportunities now in the European marketplace, given the underpinnings of European regulations and the growth of quality management in Europe. We are keen on Europe. Our ‘Fund One’ was 70% deployed in the U.S. and 30% in Europe. The target for Fund 2 is 40% in North America, 45%  in Europe and 15%  for the rest of the world.
There has been a lot of talk here about what could be done to spur innovation. What’s the single biggest thing that could happen from your perspective? Is it government policy?
The most important factor for us is the ability to access project financing. We have a lot of companies that have emerging technology which address key environmental issues, where there is economic drivers around those issues, but there’s still a dearth of project financing to help us build those projects. The biggest driver is the ability of the large-lender institutions to get comfortable with this space.
So it’s still credit crunch that’s holding renewables back?
People have less money to lend, they want to lend less money. But also we have a new asset class here, a new range of technology—whether it be problematic waste stream, or better energy efficiency from homes or a large [Solar] power plant—and lenders need to get comfortable with that. Given the credit crunch, they seem less inclined to put the time in to get comfortable.
They stick with the old reliables and the big-name projects?
The renewable projects that get financing are the large marquee ones, which makes sense. There’s enough capital to be deployed that [the lenders] will spend time to get comfortable with it. If they are dealing with, say, a smaller waste-to-energy plant that is dealing with food stuffs or sewage sludge, it’s hard to move the lenders to get knowledgeable enough to make a lending decision. Until that happens, you are left with projects that are all equity financed which is very difficult—in an arena that is already difficult economically as we wait for better technologies and better economies of scale.
How will that change?
There are private equity players that can get plants up and running to prove that it works. That can help get the attention of banks as debt providers. This is the only way it’s going to happen.
If governments could do one thing to help, what would it be?
They could work with project financiers on the project debt side to give them comfort around getting projects done, that would be huge.
How would they do that?
By providing guarantee to the project’s economics, or giving some guarantee to the debt.
Is there precedence for that?
If you think of the loan guarantee program in the U.S., some of the loans they have given out—for example to [solar thermal company] BrightSource to build power plants—they have in essence given a guarantee to lenders that the federal government will back up. That has opened up a huge lending pool. In Japan, there are measures in place where they are helping to build manufacturing facilities with Japanese government debt. This can kick start the market, and also help with job-creation.
Does Europe have a geographical hot spot for cleantech innovation?
We are looking at investments in U.K,, France and in Scandinavia. We see good innovation coming out of universities and excellent management teams. Overall, though, the message is that we are feel good about Europe, and see the balance shifting in its direction.

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