VCs may be hot for cleantech, but markets stay lukewarm

Special to The Globe and Mail

Wind farm and nuclear power plant (Comstock Images/Getty Images/Comstock Images)

Clean technology investing in 2011 is like something out of a Dickens novel: it’s a Tale of Two Markets. Venture capitalists continue to gush over the sector, but markets are less exuberant.

My firm continues to believe in the future of cleantech – the group of emerging technologies and industries, based on principles of resource efficiency – and thinks it remains a significant growth opportunity for years to come. But it’s also important not to expect too much too soon, and some of the data surprised both me and my colleagues.

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The venture numbers are solid. According to the Canadian Venture Capital Association, in the second quarter the cleantech sector received $66-million of investment, or over 20 per cent of all dollars deployed. That number is comparable to the U.S. figures, which saw 23 per cent of all VC investments end up in green technology in 2010. In each country, cleantech has been the number one sector as a destination of VC funds.

With all that interest from venture capitalists, one would expect public markets would be equally enamoured.

When the cleantech sector was first getting started, early investment returns were compelling. From late 2006 to May of 2008, a U.S. cleantech ETF was up over 40 per cent while the NASDAQ was essentially flat. But fund managers can be a fickle bunch and aren’t above asking “what have you done for me lately?” Since 2008, the ETF has declined slightly while the NASDAQ has been up over 15 per cent.

There is an S&P/TSX cleantech Index as well. It hasn’t been published for as long as the U.S. index, but its recent history is unsurprisingly similar to what we’ve seen south of the border. Over the last year, the Canadian index is down 3.14 per cent, while the NASDAQ is up 10.77 per cent.

(I compare cleantech with the NASDAQ for a reason: Many fund managers tend to look at cleantech and regular tech as somewhat interchangeable investment sectors. They are both supposed to be relatively higher growth/ return, but riskier asset classes.) Something else interesting emerges from a look at the components of the TSX cleantech Index. There are 50 companies on the senior exchange, with a market cap as of about $16.6-billion as of June 30th.

However, unlike the U.S. cleantech index, the Canadian group is a mixture of radically different types of green companies. About half are true players: they have proprietary technology that allows people to do more with less – in energy, water, waste and so on. The other half are companies that use clean technology (in wind farms, or solar, for example) but they are much more like utilities than tech companies. Some investors refer to the first group as cleantech and the second group as clean energy, which is a useful way of thinking about the two sectors.

If you measure only the TSX index companies that are true tech companies, the market cap of the entire group is about $4.6-billion. That is not nothing, but it’s fairly small by the standards of most large institutional investors. For perspective, it’s about one fifteenth the size of Royal Bank, or for a slightly more random example, it’s slightly smaller than the market cap of Centerra Gold (which I’m sure is a fabulous company, but probably not one that you would guess would be bigger than the entire Canadian public cleantech sector!)

None of the above is a criticism of the sector, either in Canada or the U.S. Nor is it investment advice, even implicitly. Small size and relative underperformance are historical observations and indicate nothing about what the sector will do going forward. But the data – on size of sector, relative performance, and public/private dichotomies – are all interesting and useful to those who care about cleantech.

Special to the Globe and Mail

Duncan Stewart is the Director of Deloitte Canada Research in the areas of Technology, Media & Telecommunications (TMT).