For years, the word “cleantech” sounded alarm bells with private equity investors for whom the investment boom of 2006-2011 turned into a challenging period for returns on capital. After pushing nearly $25 billion into the sector and losing nearly half of it, according to a report by PwC, many investors were put off by clean energy investing for the rest of the 2010s.
But, it’s a new day for climate investing. The cleantech sector is experiencing significant tailwinds amid growing consensus that an energy transition to cleaner technologies is important to reduce climate change and increase energy independence. There is strong demand for cleantech from countries, cities, and companies seeking to reduce carbon impacts, and this, combined with a $400 billion infusion from the Inflation Reduction Act is poised to unleash further innovation in the private sector.
As investors revisit cleantech with fresh eyes, they can approach opportunities with modern, tech-enabled software and data tools in-hand.
Sifting Through a Growing Sea of Opportunities
The increased societal and governmental support has spurred more investment enthusiasm, even as venture capital funding and deals fell overall. In 2021, climate tech startups raised more than $50 billion from venture capital and private equity. The global trajectory toward cleaner energy and climate mitigation positions companies that are developing or offering clean technology for potential high returns.
Still, the market is not without challenges. The Ukraine conflict, rising inflation, and ongoing supply chain problems all have a major impact on cleantech companies, and many are still in the early stages of establishing their commercial viability.
Clean energy technology is capital-intensive and the deal opportunities are growing at a significant pace. Investors must conduct meticulous research to sift through the sea of opportunity. Tracking and organizing every detail of deal management is critical to not only filter down to the best-fits, but to fine-tune a process that facilitates the flow of the right type of deals as the field burgeons.
For example, tracking and centralizing across the organization where deals – and in hindsight, the best deals – originate from can help to identify and formalize working relationships with the best sourcing channels. Logging all emails, meetings, and conversations – instead of every team member maintaining their own separate notes – can help to visualize more streamlined and efficient approaches.
Data is Advancing Decision-Making
In recent years, data has emerged as a central figure in strategic decision-making. Data-driven insights have replaced intuition and experience as a driving force in value creation.
In order to harness the power of data for strategic investing, it must be collected, aggregated, and synthesized. This has long been a pain point for alternative assets, where reporting is far less transparent than traditional stock and bond portfolios. It takes far more due diligence to develop a picture of, and manage, investment opportunities. Two-thirds (66%) of investment managers surveyed say they access five to eight different data streams for their investment data needs. They often employ manual processes to extract and centralize information – which simply don’t scale and make inefficiency and errors inherent.
As the number of cleantech investment deals grow, so does the need for a single source of truth to understand if objectives are being met or not. Understanding the big picture is critical, but so are the micro-views. To avoid missteps of the past, investors need both a comprehensive understanding and more granular metrics into their portfolio holdings and exposures.
The cleantech investors of today can benefit from the ability to use automation and technology to pull in and consolidate data, harmonizing all of the details to aid in decision-making. Additionally, because a great deal of their insights are gleaned over the course of many meetings and in-person interactions, they must leverage the ability of technology to record and report on this wealth of information that was notoriously difficult to fully capture in the past.
Co-Investing: Communication, Alignment is Key
The appetite for co-investing in the private equity space is at an all-time high, having been on the upswing for years. According to Private Equity International’s LP Perspectives 2021 Study, 71 percent of LPs planned to participate in co-investing opportunities during the next year.
That said, co-investing in the expanding universe of cleantech ventures can be a case of easier said than done. As the competition for deals heats up, so does the speed to complete transactions, which requires all parties involved to remain in-sync and aligned.
To capitalize on emerging opportunities, co-investment teams need to understand, in short order, the full picture of the investment: where things are overall, what’s been communicated, who’s doing what, and how all pieces of pertinent information relate to the deal. The slippage of information and time using the Excel spreadsheets, file folders, and email of the past translates today into missed opportunities – or seizing on the wrong ones.
In order to easily communicate about and execute on time-sensitive opportunities, more GPs today quickly stand-up data rooms to garner interest from prospective cleantech LP co-investors. These virtual deal rooms provide access to granular, real-time data, as well as functionality that allows investors to slice and dice to create their own analysis. They also ensure secure two-way communication, document sharing, and electronic signatures.
The future of cleantech is incredibly bright and the opportunities for growth appear to present one of the greatest investment opportunities of our time. Today’s investors can equip themselves with the modern tools that facilitate profitable investment and returns, along with powerful social impact.
Hank Boughner is the CEO of Dynamo Software, where he leads its management team and defines the long-term vision and strategy.
This article was first featured in AlphaWeek on December 12, 2022.