Sebastian Waldburg and Eusebio Güell

First published in Cleantech magazine. March 2007 © Cleantech Investor Ltd. 2007

Q - Is sustainable investing sustainable for private equity?

A - I believe it depends on the focus and understanding of investing in environmental markets. A sizeable chunk of cleantech investment consists of highly leveraged investments in infrastructure assets. These assets generally operate in an extremely regulated environment and have only limited potential to generate considerable company revaluations. In a typical private equity investment, returns are generally based on recurrent cash flows rather than on capital gains. This is obviously very different when we refer to cleantech technology investments, where capital gains are the main driver for returns.

Q - First time private equity funds generally have a tough time bringing money in. Being a first time private equity fund focused on renewables must be even harder - how do you overcome the challenges?

A - As the sector is less well known, this is absolutely true. We are trying to overcome the challenges by way of a
number of different strategies, such as generating a substantial deal flow (which can be used to our advantage
when contacting future investors). We also have raised initial funding with investors who had backed funds we managed previously in other firms and knew what they were getting into. Within the corporate governance structure of our fund, we have included a number of independent members in our investment committee and board of directors, which are well known in the sector and give a certain assurance to investors. Additionally, we have the support of third parties to assist in the fundraising, such as private banks and are considering a placement agent for the international stage of the process.

Q - What is the biggest challenge on deal sourcing within renewable energy/cleantech?

A - The challenge resides in the fact that there are several large corporates (from the utilities sector) with a
considerable spending power, interested in investing. When it comes to independent entities, however, project developers tend to prefer working with an investor such as ourselves, rather than “selling out” to big utility players. Additionally, it is key to add value to the companies during the course of the investment and prove to the existing shareholders that bringing us on board enhances their returns.

Q - Many private equity funds until recently focused on traditional sectors now want a piece of the cleantech pie. Is this a dotcom-like type of investment bubble? What are the dangers of the current euphoria?

A - An evident danger is the price of potential targets going up, as the competition increases and often transactions are being held in an auction-like style. However, there is an important difference between the current situation and the dotcom bubble: renewable energy assets are regulated and depend on administrative permits and tariff regimes (which at the same time, represents the biggest risk of investing in the sector). That means that these investments generate visible cash flows from a very early stage. Most people would agree that we live in an energy scenario where renewable energy will play an important part for the future. Obviously it will not be the only solution, but will definitely be part of it.

Q - At the moment most renewable energy projects are subsidised by Governments. Does that represent a threat to players and LPs, in terms of investment risk and change of policies?

A - The regulatory risk is the largest risk for investors in this sector. The risk is distributed between the stakeholders (manufacturers, insurance companies, banks, equity holders) but it affects everyone active in the sector. That said, there is a clear tendency by most European governments (and others) to give renewable energies a stable regulatory framework. It is also true that cost of electricity generated by renewable energies has gone down considerably over the last years (driven mostly by technological advances and efficiency in production) and that at the same time fossil fuel prices have increased. Once the pollution increases and the scarcity of fossil energy generation is adequately priced, the gap between prices for clean and “dirty” energy will disappear.

Q - How can cleantech businesses capitalise on the market opportunities and generate good returns for investors?

A - The cleantech sector is still relatively small; meaning that time to market is crucial when developing a new product or service. There is only a limited amount of demand, driven by regulation rather than desire to improve he environmental conditions (even though this is changing). I would therefore suggest that companies in this space to keep a close eye on the regulatory changes and use it as an expansion force for their products and services.

Biographies

Sebastian Waldburg and Eusebio Güell are the founders of Sustainable Investments (SI) Capital, an independent financial institution set up to develop investment products and services for renewable energy and other sustainable projects. The firm launched its first private equity fund, SI Capital R&S1 in H2 2006. The vehicle has a target of EUR 80m and aims to hold a final close before the end of Q1 2008

Formerly a director of the private equity division of investment bank Riva y Garcia, Waldburg has also worked as a corporate finance manager at Schroders Investment Bank in London, advising multinational energy players such as RWE and EnBW. He holds a degree in Politics, Philosophy and Economics from Oxford and Eichstätt University and holds a Masters in Social Anthropology from the University of London. He graduated with an MBA from IESE Business School, University of Navarra, in Spain.

Following his mandate as a vice president at the Privat Bank (Groupe Banque Degroof) Güell worked as a director of the private banking division of Grupo Financiero Riva y García. He holds a business studies degree from the
Barcelona Management School and a MBA from Universidad Comercial de Deusto, École Supériore de Commerce de Nantes and Bradford University.