Friday, October 31, 2008

US venture capital investment in cleantech companies reaches record $1.6 billion in Q3 2008 with a surge in later stage financings

US venture capital investment in cleantech companies reaches record $1.6 billion in Q3 2008 with a surge in later stage financings

Solar continues to lead US cleantech investment with seven of top 10 deals

San Francisco, October 30, 2008 — Venture capital investments in US cleantech companies reached a record $1.6 billion in Q3 2008, up 55% from the previous quarter, according to an Ernst & Young LLP analysis based on data from Dow Jones VentureSource. A total of $3.3 billion was invested in the first three quarters of 2008, surpassing the figure for the same period last year by 71%.

Later-stage rounds, which increased 177% to $906 million in Q3 from $327 million in Q2, were a major driver of the investment growth. These later-stage financings accounted for 55% of total capital invested in Q3, compared to just 36% in the prior quarter. This increase comes as many cleantech companies move into the capital intensive commercialization phase.

“In light of challenging economic times, the US cleantech market may be entering a transitional period. However, the structural market drivers of the cleantech sector remain intact, suggesting that the prospect for long-term market development is positive,” says Joseph Muscat, Americas Director of Cleantech and Venture Capital, Ernst & Young LLP. “Factors such as technological advances, consumer demand and programs at both the federal and state-level help to create the conditions needed for long-term growth in cleantech.”

A look at the investors in the 10 largest financings in Q3 suggests that cleantech companies are pairing venture financing with other funding sources to support their capital-intensive commercialization initiatives. Six of the 10 top deals incorporated private equity firms, hedge funds and sovereign wealth funds as first time investors in the entity. Two deals included initial investments by a strategic corporate investor.

Energy/Electricity Generation companies attracted the most investment of any cleantech segment in Q3 — $1 billion. Solar companies were by far the largest component of this segment with $990 million invested in 14 rounds, a quarter-on-quarter increase of 66% in capital, with no change in the number of rounds. Large follow-on rounds characterized solar financings in Q3. For example, SolarReserve, a company in Santa Monica, CA that develops solar thermal power plants, closed one of the quarter’s top deals with a $140 million second round. Solar companies closed on seven of the top 10 deals this quarter.

The Energy Efficiency segment also experienced continued growth with $186 million invested in Q3, an increase of 278% compared to the prior quarter and 48% compared to same period last year. This segment’s financings were led by Gridpoint, a smart grid company in Arlington, VA, that raised $120 million in a fourth round.

The third largest segment in Q3 was Alternative Fuels, which comprised 6% of overall US cleantech investment. The segment, made up entirely of biofuels, attracted $95 million of investment, a decline of 26% from the previous quarter. However, through the first three quarters of 2008 this sector attracted $455 million, an increase of 7% compared to the same period last year. Sapphire Energy, a biofuels company in Del Mar, CA, received the largest injection of capital in this sector with a $50 million second round of financing.

This was also a significant quarter for emerging cleantech segments. In the transportation sector, Fisker Automotive, Inc., an Irvine, CA green sports car company, raised $65 million to develop the first four-door plug-in hybrid premium sports car. The Water sector had its strongest quarter yet with three equity financings that totaled $45.5 million.

Q3 2008 cleantech market drivers and related developments

The cleantech market received a significant boost from the Housing and Economic Recovery Act of 2008, which extended tax credits for wind energy, geothermal, biomass and other renewable energy projects. The solar investment tax credit for utility-scale solar projects was extended for eight years. Qualified fuel cell properties received the same incentive, a development that could position this segment for additional investment.

The Regional Greenhouse Gas Initiative (RGGI), a mandatory cap-and-trade program to reduce CO2 emissions from the power sector in ten Northeastern and Mid-Atlantic states by 10%, became operational in September with its first auction of emission allowances. Potomac Economics reported that at the auction demand for certificates exceeded supply by more than four to one. At the same time, seven US states and four Canadian provinces endorsed the cap-and-trade plan developed by the Western Climate Initiative (WCI). RGGI and WCI will likely drive long-term demand for efficiency and emissions-reduction technologies.

Two of the seven US domiciled IPOs in Q3 2008 were completed by cleantech companies whose offerings raised $637 million (67%) of the $944 million total IPO proceeds in the period, demonstrating the ability of the sector to raise capital even in challenging market conditions. GT Solar International Inc., based in Merrimack, NH, raised $500 million in the largest US-domiciled IPO of the quarter. There are currently eight cleantech companies registered for an IPO seeking an average capital raise of $415 million, almost double the overall average for IPOs in registration ($222 million) according to Thomson Financial’s SDC. Merger and acquisition activity also continue to flow steadily with 14 alternative energy transactions in North America in Q3 and two additional deals in October 2008 according to J.S. Herold.

Note to editors:

Ernst & Young uses the following definitions to classify the cleantech industry and its sub-sectors:

Clean technology encompasses a diverse range of innovative products and services that optimize the use of natural resources or reduce the negative environmental impact of their use while creating value by lowering costs, improving efficiency, or providing superior performance.

Alternative Fuels - Biofuels; natural gas (LNG)
Energy / Electricity Generation - Gasification, tidal/wave, hydrogen, geothermal, solar, wind, hydro
Energy Storage - Batteries, fuel cells, flywheels
Energy Efficiency - Energy efficiency products, power and efficiency management services, industrial products
Water - Treatment processes, conservation & monitoring
Environment - Air, recycling, waste
Industry Focused Products and Services - Agriculture, construction, transportation, materials, consumer products

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Jack roberts