Unlisted Cleantech Sector Looks Healthy

By Victor Bivell

Eco Investor February 2009

Investing in unlisted companies is not for everyone. By tradition it is a specialist area for venture capitalists, business angels, and other high net worth investors.

But understanding the sector can give retail investors an eye to the future - the innovations that are coming down the national and industry pipeline, and the companies that are likely to become future initial public offerings.

It also gives an insight into the development cycle of businesses - from idea to major corporate, and how companies are valued and wealth created according to their stage of development.

By providing a pipeline of new products and services, IPOs and mergers and acquisitions, a healthy unlisted companies sector is important for the growth of industry sectors, and this looks to be the case with the environmental sector in Australia.

New research by Eco Investor shows the Australian unlisted cleantech companies sector looks vibrant, with plenty of companies, plenty of innovations and intellectual property, commercial potential in national and international markets, and a healthy appetite for growth capital.

Since its start in 2005, Eco Investor magazine has published one or two unlisted company investment opportunities each issue - a total of 34 so far. As specialist venture capital firms may see one to two hundred proposals each year, these 34 investments give a window into the venture capitalists' view of the industry and are as good a public view of the sector as non venture capitalists are likely to see.

With this in mind, Eco Investor analyzed the 34 investments using several key criteria to give an outline of the unlisted environmental companies sector as an asset class.

Firstly, it should be said that these companies are likely to be only a small sample of what is out there. Many companies prefer to raise capital privately and shun public disclosure, many others have already raised capital or are between fund raising rounds, and many others are not yet ready to 'go to market'. It would seem safe to assume that these 34 companies are the tip of the iceberg.

Yet by every criterion they still present a terrific variety of Australian environmental innovation. On a simple analysis by geographic origin, for example, they come from all around Australia. NSW 11, Qld 7, Vic 6, WA 3, SA 3, Tas 2, and ACT 2.

The geographic designation is based on the location of the head office, but it is worth remembering that sometimes the factory, laboratory, sales office or other key facility may be located elsewhere.

The data shows that the opportunities come from seven of the eight states and territories, and that they are roughly in the proportions to be expected by state populations. A happy conclusion is that environmental innovation and the development of environmental businesses is not localized but is happening all around the country.

The environment has many sub-sectors and this is clearly reflected by the 34 companies. By sector, clean energy accounted for 19, building products 6, water management 4, waste management 3, and consumer products 2.

With 56 per cent of the companies, clean energy is easily the leading sector. This is no doubt because it addresses what is seen as the biggest environmental issue of our times - carbon pollution, and because it has the biggest commercial rewards, which are potentially massive.

But clean energy can itself be broken up into several sub-sectors. Stationary energy accounts for 13 of the companies, stationary energy plus waste management, where waste is used to produce energy, has 3 companies, and transport energy accounts for the remaining 6. This is also a healthy spread.

The 13 stationary energy companies can be subdivided by their source of energy: biomass 3, wind energy 2, and one each for a small wind farm, carbon capture and storage, coal seam gas, distributed energy, a hybrid coal and gas power station, ocean energy, solar energy, and tidal energy.

Almost every key energy source is represented by the sample with perhaps the only key one missing being geothermal.

The six transport energy companies are also varied. Two are diesel engine technology enhancements, while there is one each for small-scale biodiesel plants, Jatropha feedstock for biodiesel, electric car infrastructure, and solar powered ferries.

Among the 19 clean energy companies, it is clear that every one is different in some way.

Among the 15 non-energy companies, building products is the largest sector with six opportunities. Two are low carbon cements, and one each for an insulation additive for paints, passive air-conditioning, a lightweight load bearing concrete system for housing, and architectural membrane roofing that can also generate solar energy.

The next largest sub-sector is water management with four companies. These are a wind-powered system for producing distilled water, a grey water purification system, an improved wastewater filter, and a system for groundwater control in mining and industrial zones.

Of the three waste management companies that do not also produce biomass energy, one can manipulate microbes to reduce sewage, one uses worms (vermiculture) to process sewage, and the other converts organic waste to animal feed.

The two consumer products are a flushable and compostable nappy, and a range of chemical-free cleaning wipes.

Many investors, especially venture capitalists, like to see companies and industries where there are barriers to the entry of competitors, and the environmental sector fulfils this. Twenty six of the 34 companies or 76 per cent have intellectual property.

Another three have licences, one has exploration leases, and one has marketing rights. Of the remaining three companies, two have different sorts of barriers as one is a community wind farm with very strong local support and the other is a jatropha plantation developer in south-east Asia with strong local village support. No information was available for one company.

When looked at by the type of investors these companies are seeking, they clearly fit the mould for unlisted high-growth companies. Twenty three or 67 per cent were seeking business angels - high net worth investors who if required can also bring some value add to the business such as management experience, market knowledge or networks.

Seven of the opportunities were for sophisticated and professional investors, reflecting the larger capital requirements or specialist nature of these opportunities. Only four were open to retail investors.

If we look at the amount of capital sought by each company we again see a healthy spread - from under $0.5 million to over $20 million.

Although the majority of the companies are early stage, overall there is still good dispersion by stage of development. Some are seed stage investments still getting their first prototypes together, while at the other end are established business wanting to expand their product range or expand overseas.

Together, the 34 sample companies score exceptionally well on all the key measures of geography, industry sectors, business stage, barriers to entry, type of investors, and amount of capital sought.

They make the environmental sector look like a terrific place to find unlisted companies with innovative technology and high growth potential.

But let's keep our venture capital spectacles on for a little longer. Raising risk capital is always hard, that's the nature of the beast, and overall these companies found it no different. Some raised capital, some have not.

All are investments with high risk and high reward. And, like every venture capital portfolio, some are doing well, some are still trying to get into gear, and some have failed.

Picking winners may be hard on the stock market, but it's much harder and much less forgiving in the unlisted market.

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