NewEnergyWorldNetwork interviews Ian Wilson the founder of New Leaf Capital. Ian discusses the challenges facing a new fund of funds in the clean energy sector and the increasing opportunities to be found in Eastern Europe.
New Leaf Capital targets investments in venture capital and private equity funds focused on the cleantech sector, and will raise capital from institutions and family offices. Ian has worked at a number of financial institutions, including Drexel Burnham Lambery, Credit Suisse Financial Products. Most recently, he spent seven years at JP Morgan where he held a number of positions including managing director, co-head of derivative distribution to Northern European corporate and financial institutions.
Why cleantech?
‘Renewable energy and cleantech is a growth area. There is increasing consumer demand, certainly within the European space, for environmental policies. I envisage that this market will grow on an ongoing basis. It will undoubtedly have volatility, because like any trend, they do not move in a straight line.
I see it as a strong growth market and the returns that are achievable are significant and in some cases are growing more significant as the market dislocation continues. The fund will target returns in the order of 20 per cent net of fees, if not greater.’
What is your focus?
‘The fund itself we envisage as having two component parts: 70 per cent would focus on renewable energy, while the other 30 per cent will be directed towards the cleantech and energy efficiency space. The returns within the renewable energy component are very attractive, between 18 and 20 per cent over the project life, this assumes no sale. If the assets were sold returns would be further enhanced. In terms of the cleantech and energy efficiency space, the numbers thus far show returns in excess of 40 per cent have been achieved.
There is also the social perspective, with the wish for future generations to grow up in a world that is not too different from this world from a climatic perspective. Therefore, if we can achieve anything positive in that direction, this is clearly a good thing.
Not all our competitors in this area have specific cleantech experience. What people really need though, as the market becomes tougher going forward, is this experience. A year ago it was very difficult to find those people, whereas today it is eminently possible. We have been very fortunate thus far that we have quite a few people who are keen to join us and come with the requisite cleantech/renewable energy experience.’
What sectors are of particular interest to you?
‘Solar and wind would be of significant interest to us. We envisage these will be key in our first fund. In the renewable energy space we hope to take exposure to funds which have very conservative series of projects, in terms of known cash-flow, and limited political risks, for example.’
What makes an investment attractive?
‘It is really about the people. You have to work with people with good judgment skills. It is quite a young sector and we are seeing a lot of people cross over between industries, but only a small subset have the requisite skills to be a success.’
Looking ahead, are there any areas you would like to explore further?
‘We are looking at secondary exposures in particular and this is definitely one of the areas we want to take advantage of in the coming months as sellers being forced to liquidate, due to funding constraints, become more realistic about the prices achievable.
From a renewable energy perspective, we are likely to look at Eastern Europe, rather than the core markets, specifically when looking at wind. With respect to the solar market, you cannot help but look to the US given the exciting developments we are seeing there at the moment.’
What are the benefits of investing in these areas?
‘It comes back to attractive investment returns. There is the proven ability to achieve IRRs in the region of 18-20 per cent in the wind sector in the EC countries. There is a demand in these markets, so you can bide your time and still obtain good returns.
The other benefit to operating as a fund of funds is that there are many institutions that have thus far stayed away from this space for a variety of reasons. If you look at the assets under management in the regular private equity world, roughly 38-40 per cent of those funds come from fund of funds. If you look within cleantech and renewable energy, there is less than four per cent coming from funds of funds, so I would argue that this area will grow significantly in the future.
As a fund of funds operating in the cleantech and renewable space, I think you have the benefit of two significant growth curves.’
What are the challenges you face?
‘Our biggest challenge is clearly raising money in the current market. The one thing that has become very clear is that there is no lack of money waiting for investment opportunities, but the market needs to become less volatile or for investors to become used to the level of volatility before people will be willing to make fresh investment decisions.
I foresee that this will be an area where it will be possible, even in the current environment, to raise significant amounts of money but it will be tough. It is not as easy as it would have been a year ago, but then again hiring cleantech veterans and access to top quartile funds would not have been possible a year ago.
What do you consider to be the biggest issue facing the industry?
‘Firstly, I think the raising of the funds under management is a huge challenge as alluded to. Secondly, private equity deals rely on the provision of debt to lever returns and this has become ever more difficult to obtain as the market dislocation continues, nevertheless leverage is still being provided and the IRRs that we are comfortable targeting are achievable, despite the current market conditions.’
How do you see this market developing?
‘It is difficult to forecast things on a macro level, particularly at the moment. Nevertheless, we have three competitors: funds of funds coming out of investment banks, funds of funds coming out of regional banks and the general private equity funds of funds that are moving into cleantech. They all have problems and limitations. By way of example, as an investor, I would never invest into an investment bank’s fund of funds in the private equity sector, because they may be focused on the next IPO event which may cloud their judgment about which fund to invest in. Likewise with a regional bank I believe they are limited by their own distribution network. For the general private equity fund of funds looking to operate in this space, the lack of experienced people will be their downfall.
In this space, there is room for independents operating without institutional pressures or conflicts who can maximise third party distribution networks, with a team of dedicated cleantech veterans.
Who will be the eventual winners? It is impossible to tell. But it is definitely an exciting place to be.’
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