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Institutional investors committed $23 billion in capital to clean-technology funds last year, but some experts see that money competing with a wall of government funding and corporate investments from around the world. The question is: Can the business grow enough to absorb the capital, said Jeffrey L. Ennis, senior managing director, Wilshire Associates. Meanwhile, institutions have billions sitting on the sidelines awaiting investment. While venture capital funds alone raised $3 billion for clean-tech funds in 2007, the number of deals has been falling steadily for the last three quarters, leaving some in the investment community wondering whether there is a clean-tech bubble forming. Some marquee buyout firms, though interested in clean tech, are biding their time.

Copyright Crain Communications, Incorporated May 12, 2008

Institutional investors committed $23 billion in capital to clean-technology funds last year, but some experts see that money competing with a wall of government funding and corporate investments from around the world.

The result: too much money chasing too few opportunities. Some question whether outgoing CalPERS CIO Russell Read's plan to form a clean-tech investment firm comes at a propitious time.

"The question is: Can the business grow enough to absorb the capital," said Jeffrey L. Ennis, senior managing director, WiIshire Associates. He also is chief investment officer of WiIshire Private Markets, the consulting firm's private equity fund-of-funds group. Wilshire Private Markets has so far shied away from investing in clean-tech funds.

According to New Energy Finance, a London-based global clean-energy research firm, $148.4 billion in new private equity, venture, government and corporate capital was invested in clean technology in 2007, up 60% from $92.6 billion in 2006. During the same period, total assets of global private equity and venture capital specialist clean-tech firms grew to $23 billion in October 2007 from $15.9 billion in October 2006, according to data from New Energy Finance.

Meanwhile, institutions have billions sitting on the sidelines awaiting investment.

The $154.5 billion New York State Common Retirement Fund, Albany, for example, will increase its commitment to private equity funds focused on clean technology to $500 million from $40 million over the next three years. Also, the $164 billion California State Teachers' Retirement System, Sacramento, has $280 million committed to clean technology investments.

While venture capital funds alone raised $3 billion for cleantech funds in 2007, the number of deals has been falling steadily for the last three quarters, leaving some in the investment community wondering whether there is a clean-tech bubble forming.

Wide ranqe of products

Clean tech covers a wide range of products and services designed to optimize the use of natural resources or reduce the effect of pollutants on the environment, while providing cost savings or improving efficiency. It includes alternative fuels, energy generation, energy efficiency, water treatment and recycling, according to Ernst & Young, New York.

Institutional investor capital in the sector has grown dramatically in the past two to three years, but now some industry insiders say there aren't enough investments to go around.

For example, worldwide venture capital and private equity investment in clean tech dropped to $2.4 billion in the first quarter of 2008 from $3.7 billion in the first quarter of 2007, according to New Energy Finance.

Whether there is a clean-tech bubble depends on the specific subsector, said Margot Wirth, a portfolio manager in CaISTRS' alternative investment program, said at a recent Milken Institute Global Conference in Beverly Hills, Calif. There seems to be an ethanol bubble, she said.

"I would agree that in some sectors in specific areas there are bubbles like ethanol," said Jonathan Bloch, senior managing director, managing partner, GKM Newport, a Los Angeles-based private equity firm, also speaking at the Milken Institute conference. "In general, (with) valuations in clean tech, you see peaks and valleys."

"There is a great deal of capital going into the space that is driving valuations in the short term," added Daniel Weiss, co-founder and managing partner, Angeleno Group, a Los Angeles private equity firm, who also spoke at the conference.

In an interview, Mr. Read confirmed his new firm will focus on identifying and developing new technologies, such as how to turn timber into biofuel. Declining to give details while he is still employed by the $248.2 billion California Public Employees' Retirement System, Sacramento, Mr. Read acknowledged there will be challenges for clean tech as an investment sector.

"There will be significant capital that will need to be channeled effectively," he said in an interview. "I believe channeling capital where it needs to be is the challenge."

Still, the credit crisis is causing investors to be more cautious of new private equity firms, Wilshire's Mr. Ennis said.

Some marquee buyout firms, though interested in clean tech, are biding their time.

"It will eventually develop for guys like us to put meaningful amounts of capital to work. We're looking around the corner," said Fred Goltz, member and co-head of the energy practice of Kohlberg, Kravis Roberts & Co, New York. "Now there is a lot of focus on clean tech and a lot of capital."