Eco Investor August 2011

Features

Capital the Missing Ingredient in Australian Cleantech

By Victor Bivell

Every Australian knows that Australia is good at invention but that often it is the overseas investors who make the big money. As a nation we've been seriously pondering this dilemma for decades, with still no solution in sight. And it applies to cleantech and clean energy as much as any other technology.

Explaining why is easy enough.

The first reason is our relatively small and isolated population. At 22 million our market lacks the critical mass to commercialize many technologies at home.

So many companies have to be "born global" or set up in the US, Europe or Asia before they can walk, let alone afford to fly. This increases start-up costs and time and makes a hard job harder.

Another reason is that our equity market is both relatively small and conservative. So our entrepreneurs need more capital but have less of it. There is plenty of institutional money for property and mining projects, but as a group the institutions have still not figured out how to make money from technology, and no one has given them the full-proof plan they want.

So we have relatively big, safe banks for property based debt, and relatively big superannuation funds who love the top 200 listed equities. But our equity and debt markets for innovative technology companies remain small and struggle to grow.

Nor is it any easier for those bigger cleantech and clean energy projects that need infrastructure levels of capital.

And at the retail investor level, for some reason the well known Australian penchant for punting on horses and junior mining stock hasn't yet grown into a love of punting on technology or cleantech.

So entrepreneurs can soon run out of doors to knock on.

Australian Venture Capital Funds - Additions and Exits to Investments in Investee Companies. Source: ABS

The government has been trying to solve this capital market problem for nearly 30 years, but with limited success. Government has done a great a job of encouraging research and development, but not as well at moving this great abundance of innovations to the next, crucial stage of commercialization.

One reason is that it put all its eggs into the managed venture capital funds basket. This was meant to encourage institutions to give venture capital a go, and many did. But apart from a small number of exceptions, Australia's venture capital fund managers have not been able to deliver the returns they promised or aimed for. The institutional view is that venture capital is too hard and takes too long.

An option the government is yet to explore is to help the angel market, as they do in Scotland and New Zealand.

Nor, so far, has it helped the small cap end of the listed market, which has many world leading cleantech companies. This is odd as Australia developed its strong mining sector through the Australian Securities Exchange (ASX) and even today there is barely a classic venture capital fund for the resources sector in sight.

One or two new Government backed renewable energy venture capital funds are in the pipeline, and will also be able to invest in listed clean energy, but these are still some time away.

So we wait for the government to twig to the old expression "go with your strengths". Meanwhile the angel market is growing steadily anyway, and the listed market continues to dig deep for many cleantech stocks.

But the ASX is as volatile as any other exchange these days, and many cleantech and clean energy stocks are still suffering from the Government's 2009 failure to introduce a Carbon Pollution Reduction Scheme (CPRS) as it said it would. This dramatically dampened investor sentiment to the sector and so far the mooted carbon tax is yet to bring back that CPRS zing.

So our many cleantech companies have only a handful of VCs to talk to, not enough angels to meet, and need to wait for the IPO window to open a little further.

The missing ingredients that could fire up the local cleantech market are performance enough from the VCs to impress institutional investors, and innovative government support for technology commercialization and the cleantech sector in particular.

So is there an opportunity for international investors? You bet there is.

Many Australian companies haven't waited, so for example fuel cell developer Ceramic Fuel Cells is listed on London's Alternative Investment Market (AIM), dye solar cell developer Dyesol is listed on the Frankfurt Exchange, and ocean energy developer Ocean Power Technologies is listed on NASDAQ.

Many companies such as these are also good enough to win backing from the governments in their new locales.

And others have been able to impress international venture capitalists. Solar thermal developer Ausra was backed by several high profile Silicon Valley venture funds before being sold last year to European nuclear energy giant Areva.

One question for international investors is why wait for the Australian companies to come to you, when the entry price may be lower at an earlier, local funding round?

Whether it is as a private investor, institutional investor or venture capital fund, Australian cleantech has proven it has great dealflow and is open to savvy overseas investors.

This article was commissioned by Creating Climate Wealth magazine in the UK.

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