Catalyzing Clean Energy Funds

Article | 3 May 2010

Clean energy companies and projects that combat the effects of climate change are a hot sector for private equity funds seeking returns for investors. Just a few years ago, the investment community paid scant attention, but the Asian Development Bank (ADB) has played a part in highlighting the opportunity.

Recognizing its key role in catalyzing a neglected part of the private equity market - and its great potential for supporting environmentally sustainable development, in 2007 ADB allocated $100 million for investment in clean energy funds, and invited fund managers to create funds that would draw in other investors. Getting ADB backing required the funds' investment strategies to be aligned to the bank's goal of promoting alternatives to coal, oil and gas sources for the energy that is fuelling developing Asia's rapid growth.

By the end of 2009, two funds were up and running. ADB put $20 million into the $228 million China Environment Fund III, managed by Beijing-based Tsing Capital, and also invested in the $54 million Asia Clean Energy Fund managed by South Korea's GS Group. Investors in these private equity funds include other development institutions such as the World Bank and the Japan Bank for International Cooperation, as well as major financial institutions and multinational corporations.

One-by-one, more funds are being incubated and rolled out, with the Maybank MEACP Clean Energy Fund and South Asia Clean Energy following the first two.

ADB's investment in any fund is the lower of $20 million or 25% of the fund's size. Since a typical investment represents no more than 10% of a portfolio, a given fund would invest in 10-15 companies. In this way ADB's money is leveraged into many companies on the ground. The bank takes cash returns from the funds' investments just like any private equity investor.

Investing in funds which share its clean energy goals allows ADB to overcome resource and investment constraints and "really leverage our money because we are investing into multiple subprojects," said Robert van Zwieten, director of ADB's Capital Markets and Financial Sectors Division. And as a development institution, ADB is in a unique position to shine a light on markets in Asia, giving commercial investors encouragement to enter.

The success of the China Environment Fund from small beginnings illustrates the way ADB's has helped spark private equity interest in clean energy and supported a young fund management company to grow in size and impact.

Tsing Capital's fund series was the first in the People's Republic of China (PRC) to focus exclusively on clean technology and environment-related investments. ADB invested in the first China Environment Fund in 2003, which pooled $13 million of private equity, and also its second, a $30 million fund in 2004. The third fund attracted $228 million from investors from around the world.

"As Tsing Capital has a lot more money to work with in this fund, they can undertake more and better projects, and that in turn leads to a greater impact on carbon emissions or other metrics," said Johanna Klein, Investment Officer in the Capital Markets and Financial Sectors Division.

Globally, clean energy investments grew from $33 billion in 2004 to a record $155 billion in 2008, according to research firm Bloomberg New Energy Finance. In 2009 public and private investment in clean energy in 2009 dropped 6.5% to $145 billion as global recession sapped funds for the sector.

The bulk of private finance is from either equity capital raised on stock markets, project finance - largely as debt to install energy equipment - and private equity and venture capital to support growing companies, which amounted to $6.6 billion worldwide in 2009. That was down 44% on the previous year as the credit crisis hurt investor sentiment, according to the March, 2010 report.

The picture in the Asia and Pacific region points to a brighter future. New financial investment increased by nearly 25% to $37.3 billion in 2009, dominated by the wind power sector - and for the first time surpassed that of the Americas, where $29 billion was invested.

ADB's Strategy 2020 identifies environmentally sustainable growth that addresses climate change as a core operational sector for driving poverty reduction.

Alongside encouraging private equity investors to commit more capital to clean energy, ADB has established numerous other initiatives and created funds to increase knowledge and investments that will help countries achieve energy security and a low carbon growth path.

ADB spent around $1.7 billion on clean energy projects in 2008, up from $230 million in 2003. Its target is for annual investments of $2 billion by 2013.

The need for diversifying sources of energy to help meet Asia's energy requirements is urgent. Energy demand in the region is expected to double between 2006 and 2030, faster than in any other part of the world, according to the International Energy Agency.

With some $6 trillion of new energy infrastructure needed to meet that growth, increasing investments that make possible the aggressive adoption of renewable energy and energy-efficient technologies across the region - and mitigate the effect of higher fossil fuel consumption - is crucial.

By helping to draw in private equity capital, ADB plays a small but significant role.