Cleantech – can family offices make any money from it?

The recent announcement that some of the wealthiest investors in the world are backing a big cleantech fund is likely to spark renewed interest in the sector, despite many venture capital firms suffering big losses for years in cleantech. Given these contrarian factors, what should family offices, traditionally among the biggest investors in cleantech, do now?

Microsoft co-founder Bill Gates announced earlier this week that he is to lead a fund that aims to reduce greenhouse gas emissions by financing clean energy technology. The initiative has some other big backers, including Amazon founder and CEO Jeff Bezos, Alibaba founder Jack Ma, and SAP co-founder Hasso Plattner. These guys all have family offices, although it is unclear whether they are using their family offices to back the fund.

Big names from the venture capital world are also involved – John Doerr, chairman of venture firm Kleiner Perkins Caufield & Byers and Vinod Khosla, founder of Khosla Ventures. The fund is part of a venture group called Breakthrough Energy, which was set up by Gates and other big investors to coincide with the so-called Mission Innovation, a huge clean energy research and development initiative launched on the opening day of the United Nations climate change summit in Paris in 2015.

With those names and their money backing a cleantech fund shouldn’t family offices pile in? From a purely financial perspective, probably not, especially if they are interested in some realistically timed returns. That’s because cleantech has been one of the worst-performing alternative investments around. And the future for the sector doesn’t look too bright, given that policymakers today look less interested in supporting cleantech initiatives with tax dollars than at any time in the past.

Earlier this year, the Massachusetts Institute of Technology’s energy initiative published a paper on venture capital and cleantech, which uncovered some pretty shocking facts about investor returns in the sector. According to the report, venture capital firms spent more than $25 billion funding cleantech start-ups from 2006 to 2011 and lost more than half their money in the process. And there’s more depressing reading about cleantech investing from the report – almost all of the 150 renewable energy start-ups founded in Silicon Valley over the past decade have shut down, or are close to collapse. Shares of public cleantech firms are trading at steep discounts to the market peak in 2008. And funding for cleantech has fallen dramatically from a peak in 2008, prompting a big fall off in start-ups in the sector.

If that’s not enough to steer investors away, here’s what investor and Silicon Valley guru Peter Thiel recently said about the sector: “In the last decade in Silicon Valley an area that’s done so badly people don’t even want to talk about it anymore is cleantech. It is sort of a toxic word for a money losing investment.”

Asked by the Bloomberg interviewer, what went wrong for cleantech, Thiel said: “If you define technology as doing more with less, the test for cleantech is – ‘can you produce the same amount of energy for a lower price’ – and that test was obscured by people thinking they could get large subsidies. They weren’t forthcoming, and (will be) even less forthcoming in the future because we can’t afford them.”

Cleantech also has to deal with some stark policy developments like the fact that president-elect Donald Trump is expected to shift energy requirements back towards fossil fuels and cleantech subsidies in many countries are being cut. All in all, the prospects for the sector don’t look good.

But, like so many investment ideas that have underperformed, other opportunities can often be found linked to the original concept. Here’s what a family office principal told Family Capital about making money from the sector: “Cleantech has the same challenges as every technology –  nobody knows who will be the winners. But in addition, there are regulations and in some cases, subsidies, muddling the picture. And just to top it off, you have a race to cut costs on the components. For an investor, this makes cleantech unusually challenging as an investment theme.”

But he added: “We have chosen to circumvent these factors, by benefitting from them. We have invested in a company that develops, builds, owns, operates and maintains solar power plants. The technology is known, the contract is made with a national entity, and the costs are continuously decreasing.  Problem solved!”

No doubt that thinking is also premised on the fact that the one part of cleantech that has performed relatively well has been solar power. But it also shows a creative way of potentially making money from the sector post the bursting of its bubble.

Another way to look at cleantech is to consider the investment returns in terms of a very long period – say 20-plus years. And that’s where family offices might still be interested in the sector given their often much longer time perspective on realising returns. Family offices like Blue Haven Initiative, which has invested in a number of cleantech businesses in recent years, is taking that approach.

But how investors look at the sector might ultimately come down to their philosophical perspective, rather than their economic one. Those backing cleantech initiatives buy into the idea of global climate change and what that means for the future of the planet. Groups like Breakthrough Energy want to invest in a carbonless future because of its good for mankind, so there’s a big philanthropic side to their investment.

OK, Gates and the others behind the new fund want to make money, but they can also afford to lose their committed investments if the fund doesn’t do as well as expected. Many family offices might not be able to afford to take that punt, or at least not to the extent of some of the world’s richest billionaires.

So, from a family office perspective, whether they invest in cleantech or not might be driven more by non-financial factors rather than anything else. That’s because for those looking at healthy returns from cleantech there is little to suggest it will perform better than it has in the past, particularly over the short to medium term. Those looking for a return might have to wait a very, very long time…or it will be a case of following their philanthropic instincts, rather than their financial.