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Private equity firms want to invest in the cleantech sector but are holding back because a lack of regulatory control and government financial incentives makes it too risky, according to research released Friday.
Investments in renewable energy projects and assets, such as those in energy efficiency, energy storage and smart grid, have the potential for massive returns but without greater policy certainty and financial incentives investors aren't going to provide the resources to enable the sector to grow, said international law firm Norton Rose in its industry report.
"Our respondents had very strong views about the need for an international treaty to provide sufficient regulatory and financial support to the cleantech sector," said Ian Moore, a corporate finance partner at Norton Rose.
"While a number of individual countries have policies in place to support cleantech, there is a demand for much greater policy certainty and for a binding global legislative framework to assist the sector to develop and grow, and to give greater confidence to investors," he added.
One third of the international private equity investors polled by Norton Rose cited the absence of a clear regulatory framework as a major barrier to entering the market while 45% said that government support and related financial stimulus was the key factor when deciding which region to invest in.
Governments worldwide are ramping up their focus on the sector but there is still a substantial discrepancy between individual countries and the effect policy is having on investment.
Some 44% of the 450 investors and cleantech companies polled in the study identified the U.S. as being the most likely beneficiary of private-equity driven cleantech investment. This was significantly ahead of the next most identified country, China, which was selected by 19% of investors and 11% of cleantech companies. The U.K. was selected by 10% of both investors and cleantech companies, a little ahead of Germany, said Norton Rose.
There is also a potential funding gap at the lower end of the spectrum because private equity firms prefer to invest in companies that have proven their technology to some degree and have the potential to grow to an attractive size and valuation within a limited timescale.
For example, over the last few months alone major buyout funds have targeted the green sector, some for the first time. For example, U.S. buyout firm First Reserve Corp.--which focuses on energy--has just made its first substantial infrastructure commitment to support renewable energy projects through a joint venture totaling up to $1.5 billion, with solar developer SunEdison, a division of MEMC Electronic Materials Inc. (WFR). At the time, First Reserve said it plans more investment in renewables.
Separately, smaller funds such as midmarket HgCapital Renewable Power Partners has ramped up the pace of investments in the sector. In February, the London-based buyout firm announced three new investments: two Spanish solar-power projects and one U.K. onshore wind project.
"The traditional view is that there are opportunities where there is less risk--the money is needed more where the projects are cutting-edge and pre-revenue," said Moore.
Several financial incentives have been mooted but nothing has been put on the table, said Moore. One suggestion, for Green Investment Banks, would go a long way to providing the debt funding for green sector deals that traditional banks are reluctant to back, he added.
-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; firstname.lastname@example.org