Time to step up investment8 May 2009
The Energy, Environment and Technology Group of the British Private Equity and Venture Capital Association (BVCA) has been set up in response to the increasing demand for more education on the opportunities this sector can offer. Simon Walker, BVCA’s chief executive, believes that hydro power projects have great investment potential. Furthermore, he adds that investing in innovative clean power technologies is not something that can wait until the economy recovers
The fact that I am being asked to write a piece for this magazine is a sign of how wide the investment reach of private equity and venture capital has become. Our industry is no longer a niche area of the financial services marketplace but a mainstream asset class. For the uninitiated, here’s a quick summary of the private equity and venture capital industry and how it operates.
Private equity firms raise capital from institutional investors such as pension funds and invest this money into larger established businesses which typically need private equity capital and management skills to continue growing. Increasingly, private equity firms are using this capital and experience to rescue businesses in trouble due to recessionary pressures.
Like private equity, venture capital firms raise money from institutional investors but invest into smaller, pre-revenue or pre-profit businesses. They tend to focus on backing technology or life-science companies developing innovative products.
The British Private Equity and Venture Capital Association (BVCA) is the trade body for private equity and venture capital. We aim to promote the industry and educate stakeholders through communication and research initiatives which feed into government, trade unions, media and the general public. Our sector encompasses private equity and venture capital firms investing across many different industries, in the UK, Europe and globally.
Part of the education process involves bringing our members together through formalised groups and committees in order to speak authoritatively with a unified voice on issues of mutual interest and concern. We formed the Energy, Environment and Technology Group as a response to the increasing demand amongst investors, the government and media for more education on the opportunities this sector can offer. The members of the group have a wide range of experience across the renewable investment space which we can harness and help inform future government policy and assist investors who wish to understand more.
The EU has a target of generating 35%-40% of its energy from renewable sources by 2020. Meeting this target will require massive capital investment. This presents private equity and venture capital investors in this sector with a unique opportunity to lay the foundations for our future energy economy.
Stepping up investment
The environmental case for stepping up investment in clean energy is obvious – the economic one is even more compelling. Renewable energy will form the backbone of the new energy economy which will develop over the next 20-30 years.
Shifting our electricity generation base from the current conventional capacity to new low CO2 capacity, primarily through wind and solar, will cost hundreds of billions of dollars. Technical innovation in the production of new vehicles that use more efficient conventional technologies, or more likely electricity, will be of a similar scale. Carbon capture and storage will be essential as we wean ourselves off dependence on coal. Hydro power projects have great investment potential and we must work to expand the capacity for storage of hydro power beyond our existing capacity.
Building vital infrastructure, training young people to become the engineers who construct the infrastructure and develop innovative new technologies, re-training older people and educating investors to improve their knowledge of the underlying sector are all immediate challenges. Equipping management teams with the requisite skills to take optimum advantage of the evident opportunities will also be crucial.
A private equity backer can take these companies to the next stage of their development by bringing the necessary skills, capital and experience. A private equity investor can also help instil focus and discipline while ensuring the growth strategy and business plan is clear.
Private equity and venture capital firms are servants of the real economy. They don’t dabble in exotic derivative instruments but invest for the long term with a view to strengthening a company and equipping it to compete more effectively. These skills are particularly well suited to the resource and time intensive nature of investing in renewable energy and clean technologies.
Investing in innovative clean power technologies is not something that can wait until our economy recovers. Innovation can provide us with a path out of recession and it will also be central to a remodelled economy. We have an opportunity to lay the foundations of a new economy based on innovation and create thousands of new, highly skilled jobs in the renewable energy sector.
However, to do this we must have certainty of regulation and a regulatory framework in place which supports those investors able to bring their capital and skills to fledgling renewable energy and cleantech businesses, and build them into world leaders. I am confident that with this support, private equity and venture capital will play a crucial role in nurturing innovation and ensuring a sustainable energy future.
Simon Walker, CEO, British Private Equity and Venture Capital Association, 3 Clements Inn, London WC2A 2AZ, UK. Email: [email protected]