Blackstone Joins The Clean-Tech Fund Parade

There is a new breed of funds moving into the clean technology sector – specialized hedge funds that have at least $750 million under management.

And they bring a new play – long and short – on the notoriously volatile sector.

But it remains to be seen whether playing the growth sector’s zigzags is more profitable than patient investment in the sector’s broader upward trajectory.

“It is an interesting philosophical difference,” notes Angus McCrone of London-based New Energy Finance, a leading provider of clean energy financial research.

“One is saying this is a huge growth story, let’s just put out money in and it will work out well in the long term, and the other is saying, well this is an exciting growth sector but there is going to be some big ups and downs, so let’s take advantage of the ups and the downs and try to get superior performance.”

Since most of the specialized funds are new on the scene – launching this and some last year – there's not much of a track record yet, says McCrone, who recently prepared a note about the by hedge funds - and funds-of-funds – into this sector.

There are at least half a dozen funds-of-funds now active in this sector, managing roughly $300 million, says McCrone, who also provided the $750 million estimate.

He said there was considerable variety, in size and investment strategies, within the expanding universe of specialized hedge funds, thought to currently number about 70.

The involvement of heavy-hitting funds is the latest evolution in a sector that launched at the turn of the decade, first with small boutique venture capital firms, such as Nth Power, followed by mainline Silicon Valley venture capital funds a few years later.

More recently, investment banks, private equity and mutual funds have joined the parade, and large hedge firms have also started devoting some of portion of their funds for clean tech.

Blackstone Group became the latest private equity group to jump in, announcing this week it had formed a new clean tech business group that will both make investments and advise the group’s other investment vehicles in renewable energy strategies.

Steve Schwarzman
Steve Schwarzman

Company officials declined to discuss the new fund, saying fundraising has yet to begin.

But Blackstone has a solid background in energy. It has committed $3.5 billion – about 10 percent of the capital it has raised since its 1985 launch - in energy.

Sources say the new fund will aim to raise at least $500 million, and as much as $1 billion, and hopes to close by the end of the year.

That’s in line with the size of some other recent funds – such multiple launches by Kleiner, Perkins, Caufield, Byers - and are part of what Ron Pernick, managing director of Clean Edge, a leading specialty publisher, says is the “next wave” of clean tech investors.

“As a sector becomes more mainstream and established, a broader spectrum of investors comes in,” said Pernick.

There seems to be strong momentum. McCrone says 17 new long-only clean tech mutual funds launched last year, more than in the previous three years combined.

Private equity has been particularly active and several shops, including mainstream Carlyle Group, got the jump on Blackstone with earlier dedicated funds.

Carlyle teamed up with New York-based Riverstone, a private equity shop focused on the energy sector, to launch clean tech funds, including the $1.1 billion Carlyle/Riverstone Global Energy Power Fund II, which, with Florida Power & Light owns and operates, one the world's largest solar thermal arrays in the Mojave Desert.

Overall, some $150 billion was invested in clean technologies around the world last year, according to New Energy Finance.

Most went to support young companies, whose valuations are in a near constant state of flux.

This adds volatility to a sector already susceptible to significant sentiment and policy-based swings.

The sector was up by 58 percent in 2007, according to NEF's data, but is down 20 percent this year.

Underlying sector drivers remain strong – wind and solar have been growing 30-40% in the US in recent years - and could really take off if plans, such as those setting ambitious renewable energy targets, advocated by billionaire oilman-investor Boone Pickens or former Vice President Al Gore, are adopted.

With so much money pouring into the sector, it could overheat -- as has been the case with certain sectors already -- but Pernick doesn't see a broader meltdown anytime soon because tremendous amounts of capital are needed to transform the country’s energy infrastructure.

“In some ways these are the new industrials,” he says.