Clean tech investor survey reveals heavy reliance on internal due diligence

More than half (53%) of clean tech investors say that external due diligence is very important in major investment decisions, according to a new survey.

However, the survey of more than 120 clean tech investors conducted by Ricardo Energy & Environment with green industry business network ecoConnect also found that most (72%) don’t have a panel or register of external due diligence advisers in place.

The main factor cited by respondents for not using external due diligence is the expertise that exists within their internal teams (73%). This is despite only 35% of respondents having a high level of confidence in the due diligence conducted on their own deals. Ricardo Energy & Environment cautions that a heavy reliance on internal due diligence could be a risk for investors operating in the clean tech sector.

“Technical due diligence is increasingly a core component of successful cleantech investment deals,” said Dr Adam Read, Ricardo Energy & Environment’s practice director for resource efficiency and waste management. “With new technologies and investors joining the market, the need for qualified and robust advice on business planning, technology selection, facility performance and feedstock is more important than ever.

“However an over-reliance on internal due diligence could be a risk in this sector which involves factoring in a long term business cycle and expensive equipment that is not always well understood. Understanding government incentives is also vitally important for many technologies. This knowledge is not always on tap within internal due diligence teams which could result in a failure to meet investment objectives.”

The most frequently cited sectors of ‘current deal focus’ were biomass power, energy from waste and non-domestic energy efficiency (14-15% each), followed by renewable heat (11%) and waste recycling (9%).

Biomass power has benefited from the Renewables Obligation for many years, with the Renewable Heat Incentive creating new opportunities for heat-based projects. The survey supported Ricardo Energy & Environment’s own experience that focus on the fuel supply chain is increasing.

While for over two decades, energy from waste and waste recycling deals have benefitted from the availability of significant incentives through the private finance initiative and regulatory mechanisms, such as the 1995 Landfill Directive. In Ricardo Energy & Environment’s view, the rapid pace of anaerobic digestion (AD) project development also looks set to continue, with the Green Investment Bank identifying an existing investment pipeline for AD consistent with a required capital investment thought to be in the region of £650 million.

“The focus on non-domestic energy efficiency deals highlighted in the survey reflects the role of energy efficiency in addressing the potential short-term energy gap,” said Ricardo Energy & Environment’s practice director for energy and climate change, Heather Haydock. “Investment is driven by a range of incentives to improve energy efficiency and to reduce greenhouse gas emissions.

“The emphasis on these deals reported by respondents also reflects the expectation that these projects offer a high potential return on investment, with another likely factor being companies looking to reduce energy costs during the recent challenging economic conditions.”

Ends

Notes to editors:

Ricardo Energy & Environment and ecoConnect carried out an online survey of the clean tech investment market. More than 120 companies responded to the survey including private equity firms, fund managers, investment banks and financial advisers.