It isn’t always the natural order to go from big to small, but that’s what some venture and private equity investors are doing in the clean-technology space in China–moving away from investing in large solar and wind power deals, and instead seeing better value in downstream businesses offering services, software and solutions, say industry experts.
The amount invested into Chinese solar and wind venture-backed deals has traditionally surpassed other segments in the clean-technology space, including energy storage and recycling. For example, in 2006, solar and wind deals together totalled $176 million, far outpacing other sub sectors including energy efficiency at $8.6 million, and waste-focused transactions at $11 million, according to data provided by VentureSource, an industry tracker owned by VentureWire publisherDow Jones & Co .
However, in the last couple of years that has U-turned. Last year, $78 million was invested into energy efficiency product venture-backed companies, compared with $26 million into solar-focused deals, and $67 million into wind-based transactions. Likewise in 2010, energy efficiency venture-backed companies saw $220 million, far outshining the $58 million that went into solar deals, while wind transactions saw no funding at all, data show.
“Clean technology is truly shifting from large, money-bleeding projects…to smaller, but profitable and scalable technological innovations applicable in clean-tech,” said Tony Luh, general partner and greater China president at Westly Group, a clean-tech venture capital firm that also has offices in Menlo Park, Calif.
Recent overcapacity and over-investment into solar and wind projects in China have prompted investors to shun these sectors, said Mr. Luh, adding that U.S.-based solar systems manufacturerSolyndra ‘s bankruptcy filing last year has also muddied the waters. Solyndra had received backing from the likes ofRedpoint Ventures ,RockPort Capital Partners and Argonaut Private Equity.
In fact, Chinese clean-tech companies that provide services, solutions and software have been under-invested in, deemed too small an investment for larger international private equity players, while not in a suitable sector for many local Chinese firms, said Niklas Ponnert, chief financial officer atOrigo Partners PLC , a London-listed investment company that targets clean-tech and natural resources-based companies in China.
Most domestic general partners are focused on investing in consumer-related companies that are “easier to understand” and are generally expected to complete an initial public offering within a couple of years, he said. While, clean-tech investment involves a “bit more risk, is a bit more early stage, and companies take longer to exit.” Origo is targeting an internal rate of return of 20% to 25% on its investments, Mr. Ponnert said.
He cited Origo’s portfolio company,Unipower Battery Ltd ., as an example of a clean-technology company providing a “solution,” as the Beijing-based business plans to supply material and batteries to electric vehicles, which the Chinese government is promoting the use of. He added that Origo had deemed solar “past the top of its cycle” when considering investments in the mainland.
Overall, investment into the whole clean-technology sector took a hit last year, almost halving compared with 2010, VentureSource data show, with $368 million worth of venture capital backing going into clean-tech in 2011, compared with $634 million a year earlier. This year, second quarter clean-tech investment totalled $39 million, outpaced by the first quarter’s $53 million.
Westley’s Mr. Luh attributes the year-on-year fall to generally poor investor sentiment on the back of concerns about the ongoing debt crisis in Europe, which has reduced other governments’ ability to support clean tech initiatives. The Chinese government earlier this year said it aimed to pour 10 trillion yuan into developing the industry as the country battles increasing pollution.
In addition, Christiaan Kaptein, head of private equity Asia at SAM and Robeco, which focuses on sustainable investment, said the domestic Shanghai stock exchange fell sharply in 2011, but private company valuations failed to follow suit, so “investors may have been on the sidelines in the expectation that prices would adjust.”
Looking forward, Mr. Kaptein said that his firm likes sectors including energy efficiency and sustainable agriculture, while sweet spots for Mr.Luh include energy storage and light-emitting diodes.
Write to SonjaCheung at Sonja.Cheung@dowjones.com. Follow her on Twitter at @SonjaCheung