By Glen Martin, The Financialist

Despite recent market setbacks, many investors, especially venture funds, remain confident that cleantech and renewable energy’s long-term prognosis for growth and profits remains strong. 

Three years ago, cleantech – particularly energy-related cleantech – was all the rage, attracting both lavish government support and abundant private capital. Despite this backing, a number of companies folded. Others, including solar developer BrightSource Energy, canceled its initial public offerings because of the tough market conditions facing the sector. The California company scrapped its $182 million IPO despite having secured a $1.2 billion loan guarantee from the Department of Energy to finance construction of its game-changing, 370-megawatt Ivanpah solar power project.

The end of key government funding programs, such as the loan guarantee that helped finance Ivanpah, convinced some VC funds to rein in their cleantech investments.

“We’ve seen a slowdown in wind (generated power) venture capital investment in particular,” observes Allen Burchett, North American senior vice president of ABB Group, the Swiss-based developer of power and automation technologies. “In the main, that seems driven by uncertainty in the production tax credit.”

ABB, along with several venture funds, has invested in a number of cleantech companies, many developing energy management and smart-grid solutions.

“Venture capitalists have, say, a four- to seven-year investment horizon – they want to get in and get out in that period. Beyond that, their tolerance wanes,” explains Burchett.  “The problem is that the technologies we’re working on typically involve much longer time lines. This has made some investors nervous.”

Other, more cyclical factors have made some VCs wary of investing in alternative energy. For example, natural gas production has boomed following improvements in fracking technologies. As natural gas becomes cheaper and more abundant, interest inevitably slackens in fuels and power sources that are expensive and often unproven.

But if cleantech is wobbling on the VC ropes, it is by no means about to hit the canvas. The same macro factors – climate change, concerns over peak oil and the rise of China and India and their seemingly insatiable appetite for energy – continue to support the long-term viability of the sector.  So too does government fiat, especially at the state level, despite growing calls in Washington for less government spending.

“Renewable portfolio standards are now required in 26 states,” observes Nancy Pfund, a managing partner of DBL Investors, a San Francisco venture capital firm specializing in cleantech projects. Pfund is referring to regulations that require increased energy production from renewable sources.

“In California, for example, 33 percent of the state’s electricity must come from sustainable sources by 2020,” Pfund says. “And we only see that trend getting stronger, regardless of the political dialogue. The reality of geophysics and geopolitics demands it. That’s why virtually every country on the planet is ramping up efforts on sustainable energy, and that’s why we (DBL) are still very bullish and investing heavily.”

Pfund believes the decline in venture investments is a temporary bump on the road. Making the transition from one energy source to another is challenging, both in terms of the technology and funding. “Change is never a smooth ride,” she observes. “There were dislocations when we moved from whale oil to coal, and from coal to petroleum and natural gas.”

This view – that the current downturn is more of a blip than a trend – may be on the mark.

PricewaterhouseCoopers recently released a report showing that investment in the sector remains robust, with $4.6 billion devoted to 342 deals in 2011, up more than 17 percent from the $3.9 billion invested in 307 deals in 2010. Clean technology as a percentage of total VC investment has remained stable in the past year, accounting for 15 percent in 2011 compared with 16 percent in 2010. In the first quarter of 2012, $950 million flowed into 73 cleantech deals.

All in all, the sector is more than holding its own. Rather than pulling their money out of cleantech, VCs are diverting funds away from solar, wind and other capital-intensive energy generation projects into investments that are more in line with their core Internet and information technology expertise. As such, more funds are backing companies developing energy management software services or smart-grid technologies.

Fund managers also indicate that any decline in the U.S. is offset by growing investment overseas, particularly in China.

“There may be this sense that investment in the U.S. has slowed since 2008, but that has been offset by global investment,” says Anand Kamannavar, an investment manager at Applied Ventures, the venture capital fund associated with Applied Materials, a leading nanotechnology manufacturing firm.  “By that I mean both foreign money invested in the U.S. and U.S. money invested overseas.  We’ve just opened an office in China, and we’re also involved in projects in India, Singapore and Australia.”

Eileen Tanghal, Applied Ventures’ senior investment director, provides specifics.  “We’ve done 39 deals in cleantech, mainly involving solar photovoltaics, (power) storage and lighting,” she says.

As Kamannavar sees it, most of the investment community’s “problems” with cleantech can be attributed to the sector’s new-kid-on-the-block status: It simply hasn’t been around very long.

“We’re very early in this process,” he observes. “With start-ups, you typically have nine to 10 years to the IPO. So I think we’ll start seeing the first big cleantech IPOs around 2014 or 2015.  After that I think things will stabilize considerably.”

For more on this story go to:

http://www.thefinancialist.com/seasoned-investors-unfazed-by-cleantechs-growing-pains-credit-suisse-cleantech/