United Kingdom
The green revolution: an investor's view - David Bevan
Few would argue that climate change is near the top of the global political agenda. The sheer scale of the problem and, more importantly, the likely cost of addressing it (estimated by Lord Stern at around 1% of GDP per annum) must provide opportunities for businesses in such a large new market. But has this promise translated into economic success for businesses and investors looking to cash in on this latest economic boom?
One way to answer this question is to look at the performance of companies with “green” focus on the equity capital markets. Few companies on London’s main market are solely clean tech focussed, so their performance doesn’t give a clear indication of investor appetite for “green” businesses. AIM, London’s junior stock market provides a better barometer. Lightly regulated, it is suited to less well-established companies typical of those with a clean tech focus.
AIM prospered in 2005-2007 and by the end of 2008 there were almost eighty clean tech companies on the market. Since then, investor appetite has collapsed. In 2009, just 29 new companies joined AIM. Only one of these, Indian Energy (a company which owns and operates a small wind farm in India), has a clean tech focus. It raised £10m on IPO, which hardly suggests an investor gold rush. The good news is that BDO corporate finance advised on this transaction, helping to maintain our strong track record in this growing sector.
Our in-house research shows that the 59 green companies which remain on AIM have generally underperformed the wider market since January 2008.
So why have investors given green business such a rough ride? Uncertainty is key to their behaviour. Few sectors escaped the economic crisis which followed the credit crunch; hence the dramatic reduction in appetite for IPOs. Green businesses with unproven technology carry more risk and are less attractive to investors in a downturn.
In the longer term, returns for clean tech companies will be driven by the regulatory environment, the price of carbon and the cost of traditional energy sources such as oil and gas. Businesses with a clean tech focus have suffered more than most in the current economic crisis because of a lack of clarity in the market around green stimuli and their implementation; there is a gap between the political rhetoric and how it is actually impacting businesses. As Ian Plunkett indicated in his article just before Christmas, the recent climate change conference in Copenhagen has done little to close this gap.
Despite the recent economic gloom, outlook for businesses that will play a part in dealing with climate change remains positive. Market activity is unlikely to remain depressed for long. Away from the public markets, green business continues to attract private investment. According to New Energy Finance, global clean tech investment increased from $13bn in the first quarter of 2009 to an average of over $25bn in the subsequent two quarters – a growing trend. Watch this space.
If you would like to discuss this matter or for any advice of how BDO can help your business, please contact Brent Goldman, Partner, London Corporate Finance team or David Bevan, Director, London corporate finance team.