Venture Capital Plugs Back In To Cleantech

By Aaron Levitt | April 07, 2010 AAA

With the price of oil rebounding above the $80 level, investors are once again are thinking about alternative energy and efficiency methods. Cost is the No.1 factor in alternative energy, and because oil, coal and natural gas prices have remained low, this has made the past year painful for renewable energy investors. The broad-based ETF proxy for the PowerShares WilderHill Clean Energy (NYSE:PBW) ETF has been pretty much flat over the past 52 weeks. The Obama administration has been a supportive entity in promoting green technologies, but more recently, alternative energy and efficiency has taken a back seat to healthcare and the general economy.

With the economy frozen in the muck, green venture capital investing has stalled as well.
The number of deals has continued to rise throughout the decade, but in 2009 only $5.7 billion was invested, down from the $8.5 billion in 2008. Luckily, 2010 is showing some signs of improvement.

IN PICTURES: Top 10 Green Industries

New Record Deals
Investment in the sector jumped nearly 29% from the fourth quarter 2009 to the first in 2010. Globally, in the first months of 2010, cleantech firms raised more than $1.9 billion in venture capital, an increase of 83% over the same period a year ago. Funding is coming, not only from private investors but from some unlikely sources such as major multinational corporations.

The IPO market for green companies is also on the rise. This year, there have been 13 cleantech IPOs, which have raised a total of $1.5 billion. The market for green tech investing is increasing with big names such as General Electric (NYSE:GE) planning on doubling its EcoImagination budget over five years to $10 billion and Google (Nasdaq:GOOG) beginning to spend its cash hoard in the area as well.

Playing on the These Trends
Roughly one-third of all cleantech IPOs get acquired by a larger company. Investors wanting to play this trend can stick to buying names such as Google - which has made it known that it is serious about tits alternative energy and green efforts - or one of the various exchange traded funds in these areas.

Cleantech is used to describe products or services that improve operational performance or efficiency while reducing energy consumption, waste or pollution. While alternative energy is a form of cleantech, investors placing their bets on renewable energy funds, such as the Market Vectors Global Alternative Energy ETF (NYSE:GEX), are missing out on opportunities in pollution control and energy efficiency. PowerShares Cleantech (NYSE:PZD) provides wider exposure and encompasses all the major cleantech ideals. The fund is quite global with about 50% of its 76 holdings coming from outside the United States and is pretty even in terms of market cap size positions. The cleantech ETF charges 0.60% in expenses.

In February, Tesla Motors filed its IPO documents and 27 other transportation deals and received $704 million in venture capital. Fuel efficient cars and trains seems to be one area where consumers can really get behind and the PowerShares Global Progressive Transport (Nasdaq:PTRP) is the way to play it. Focusing on companies that engage in businesses that stand to benefit from a societal transition toward using cleaner and more efficient means of transportation, the ETF holds a wide variety of companies including Buffett favorite BYD and natural gas play Clean Energy Fuels (Nasdaq:CLNE). The fund is thinly traded and should be considered a long-term hold.

The solar sector recorded $322 million in venture capital deals during the first quarter combined with $217 million in 39 deals relating to energy efficiency. The Claymore Global Solar Energy (NYSE:TAN) ETF is a liquid way to play the solar sector, while new fund First Trust NASDAQ Smart Grid Infrastructure (Nasdaq:GRID) taps into the need for more energy efficiency.

Bottom Line
The first quarter saw giant leaps in the number of cleantech venture capital transactions. Higher fuel costs and a stabilizing economy will help to continue to push these deals. Investors with long enough horizons should consider adding one of the previously mentioned funds to a portfolio to capitalize on these trends. (Innovations in energy and consumption grow as companies adopt them to reduce costs. For further reading, see Clean Or Green Technology Investing.)

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