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Investing in energy technologies

The global demand for energy is increasing and the need to improve energy efficiencies and reduce the emission of greenhouse gases is eminent. So far, energy production has been based on large power stations and CHP plants. However, in the last ten years several new energy solutions, based on smaller decentralised energy technologies, have become a real supplement to traditional forms of energy supply, say Henrik Berchtold and Thomas Skovbjerg from BankInvest Group.

Market growth within new energy technologies is expected to be approximately 20-30% per year for the next decade, significantly exceeding the growth forecasts for most other sectors. By 2060, it is estimated that more than half of the world's energy consumption is to be generated by new energy technologies.

Technology development and increased capital investments have already helped make the new energy solutions space, such as fuel cells, advanced batteries, power electronics, wind power and solar power, increasingly more competitive compared to traditional energy production and distribution. Significant cost reductions have been achieved through material science, higher power efficiency levels, system integration, volume production and much lower disposal and recycling costs. We believe that this development will drive the emerging energy technologies faster towards full commercialisation and that these technologies will capture an increasing market share of future investments in power generation and distribution capacity.

Venture investments within the new energy solutions sector in the USA are now more than $600 million per year and represent more than 3% of the entire value of US venture investments. This trend is set to continue. In Europe, the venture investments in this space are about $350 million per year and still growing rapidly. During 2004 the amount of capital dedicated to new energy technologies as a share of total capital for new funds rose from 1% to 4%.

The basis for venture investments in Europe within energy technologies is particularly attractive because most European governments have implemented very favourable incentive schemes for the deployment of new energy technologies. Most of these incentive schemes often provide a very generous subsidy in the form of a direct cash subsidy or future cash payments based on energy produced to the entity installing a new energy technology. These incentive schemes help venture capitalists investing in Europe to eliminate some of the risk related to market penetration for new energy technologies.

One of the first venture funds in Europe to specialise in investments in new energy technologies is P/S BI New Energy Solutions from Denmark. This fund was established by the BankInvest Group in 2002 with DONG, the state-owned oil and gas company in Denmark, as lead-investor and the BankInvest Group as asset manager. BankInvest, the third largest asset manager in Denmark, managed to raise a total of €51 million for P/S BI New Energy Solutions.

Long-term investments

In Europe and North America there are many viable projects and companies focused on development and production of technologies that will help to improve energy efficiencies and reduce the emission of greenhouse gases. Examples of such technologies are wind power, fuel cells, geothermal energy, biomass, microturbines, hydro power, solar cells and flywheels.

Many of these companies have a large growth potential, but lack competent and risk bearing venture capital to finalise and commercialise their technologies. Focussing on three important areas within the energy sector; renewable energy, distributed energy and improved energy efficiency, P/S BI New Energy Solutions has so far been able to find a number of good deals within the new energy solutions space. This has until now resulted in investments in energy technology companies from Norway, Germany, the UK and the US.

The bulk of investment proposals received by P/S BI New Energy Solutions come from Denmark or the neighbouring Scandinavian countries. The Scandinavian market for new energy solutions is particularly interesting, as there is a long tradition in Scandinavia for the development of new technologies for energy production. For example, Norway has a long tradition for the use of hydro power, while Denmark is still a world leader in the development and deployment of wind power. In Sweden many efforts related to the use of waste products from the forest and paper industry for biomass energy production are ongoing, while Finland has a very strong background in the development of power electronics and technologies around improved energy efficiency and optimisation. P/S BI New Energy Solutions has in the last three years evaluated more than 150 investment proposals from Scandinavia.

In terms of investments, we primarily focus as follows:

• Environmentally clean, smaller, distributed power generation, energy conversion, energy storage and grid connecting technologies
• Electrical power generated from renewable energy sources such as solar, wind and water
• Electrical and thermal energy generated from the use of clean fuels such as natural gas, hydrogen and bio-fuels
• Components and products for more efficient and reliable energy conversion and utilization

When investing in promising energy technology companies, a future sale of the company has to be taken into consideration during the investment decision-making process. It is therefore essential that a company has the potential to develop into an attractive acquisition for a competing company or to be sold through an initial public offering.

Investment Process - selecting the Investment Case:

The core competence of P/S BI New Energy Solutions is the thorough selection of the most interesting and promising companies. The investment process is based on a long-standing investment experience combined with industry specific expertise. During the investment process the companies are screened one by one and the most interesting investment opportunities are short-listed and presented to the Advisory Board, the investment committee of the fund.

The short-listed companies present to the Advisory Board who then provide comments and feedback to the investment case. The Investment Team takes the feedback into consideration in their continued due diligence and then it makes the final decision on whether to invest or not. This decision is always supported by a formal approval from the board of the fund.

The companies in the portfolio are tracked closely by the Investment Team and the Advisory Board providing them with support and advice on product development, production strategies, marketing, financing, product distribution, etc. Furthermore, the Investment Team and the Advisory Board assist companies in achieving the best possible business development. The crucial difference between success and failure is a well executed business development based on market demand and cost effective product offerings.

The process is finished when the Investment Team determines that the company has achieved its performance and potential. The shares in the companies are then sold either to a larger investor or via the capital market through an initial public offering. The investment timeframe is usually 5-6 years. General support and continuous dialogue with the management and utilization of the expertise of the Advisory Board members are a key part of this process. Due to the heterogeneous nature of the companies, exits are planned on a case-by-case basis. In the case of extraordinarily successful investments, exits may occur after a relatively short investment period.

Investment Criteria:

• An innovative business concept with a technological and competitive edge compared to competing products or solutions
• A credible and experienced founder or management team
• A strong technology platform with one or more products approaching commercialisation
• Clearly defined needs based upon a realistic business plan
• A significant home market with a world wide potential over time
• Products and technologies safeguarded by a strong patent portfolio.

The company must be able to:

• Prove that its business model will work with cost effective and competitive products
• Show that it is able to attract the required strategic partners
• Show that it has a realistic operational development plan ready for implementation
• Obtain early revenue from product sales and generate a positive cash flow within a reasonable time frame.

BankInvest is a leading independent Nordic asset manager of mutual funds, venture capital and discretionary mandates for institutional clients. For more information on BankInvest Group and P/S BI New Energy Solutions, visit http://www.biventure.com. Henrik Berchtold, Head of Venture Performance, BI Technology, BankInvest Group; Thomas Skovbjerg, Investment Manager, New Energy Solutions, BankInvest Group.