Sustainable Affairs: GLOBAL WARMING: Is An Alternative Energy Bubble On the Horizon?

by Abbi Adest

With Al Gore's 'An Inconvenient Truth' sweeping Hollywood and monster storms swamping coastlines, global warming is nearly impossible to ignore anymore. Add to this perennial Middle East tensions and peak oil fears and you've got the perfect recipe for a looming energy crisis. How do we save the world and still live our energy-dependent, modern lifestyles? Many corporations, venture capitalists and individual investors believe that cleantech is the answer.

The New York Times reports today about a new study on the state of the cleantech investment. The report, published by Lux Research, focuses on start-ups, IPOs and M&As. The following are key points from the report:

Cleantech has captured the imagination of government, corporate, and financial leaders. George Bush's 2007 State of the Union address emphasized alternative energy and action against climate change; CEOs at firms from GE (GE) to BP (BP) to Toyota (TM) tout their new revenue streams from cleantech; and bellwether venture capitalist John Doerr calls cleantech "the largest economic opportunity of the 21st century."

The warning signs of a bubble are appearing in the energy segment, where IPO value rose from $1.6 billion in 2005 to $4.1 billion in 2006 and venture capital raised went from $623 million to $1.5 billion, primarily on solar and biofuel deals. With 930 energy start-ups operating worldwide - 198 of which are venture-funded - energy technology looks primed for a classic private equity boom and bust.

At the same time, the air, water, and waste segments present hidden opportunities that are relatively starved for investment. For example, the waste segment accounted for 32% of M&A value last year but only 1% of IPO value and 4% of venture capital.

Total cleantech R&D funding hit $48 billion in 2006, with energy claiming the lion's share. Of this, government funding totaled $24 billion in 2006 with energy taking 57%; corporate R&D spending hit $22 billion in 2006 with energy accounting for 55%; and cleantech venture capital [VC] totaled $2.04 billion in 2006 to reach a cumulative total of $6.06 billion since 1995. VC money has been highly concentrated:
Since 1995, the top 10% of venture-funded start-ups have received 39% of cumulative capital deployed.
Approximately 1,500 cleantech start-ups operate worldwide - 930 in energy, 45 in air, 90 in water, 120 in waste, and 315 in sustainability. Regionally, there are 1,020 in the U.S., 225 in Europe, 180 in Asia/Pacific, and 75 elsewhere. Of these, 356 - 23% - have received some institutional venture capital funding.

30 cleantech initial public offerings [IPOs] occurred in 2006, worth $4.4 billion - up sharply from 19 deals at $1.7 billion in 2005. Energy accounted for 92% of deal value; Europe claimed 63% on a few large deals. U.S. exchanges have lost their lead in cleantech offerings; more IPOs by value have occurred on European exchanges than U.S. ones since 2005.

59 cleantech merger and acquisition [M&A] deals occurred in 2006, worth $4.2 billion. In contrast to IPOs, M&A value was more evenly distributed with 43% in energy, 32% in waste, 17% in water, 8% in sustainability, and 1% in air.

SeekingAlpha