A Popular Myth: “Clean tech is a noble way to lose money”

There is a widely held belief among LPs, CIOs, and analysts that climate tech has been a money loser for almost two decades.

This is not true.

Tesla Gigafactory 1 in Nevada — a pretty good ROI so far.

In fact, over the last ten years climate tech has matched or outperformed the broader market in at least three significant segments:

In private VC/PE, climate tech has outperformed the broader market over the last decade.

In public equities, “The Green Majors” have outperformed “Big Oil” over the last decade.

In superstar stocks, Tesla has outperformed…just about everything.

Let’s dig in.

“Clean tech has been a noble way to lose money.”

In a 2013 interview with The Wall Street Journal, Joseph Dear, CIO of the California Pulbic Employees’ Retirement System (CalPERS, the nation’s largest pension fund) summed up this consensus belief after having deployed over $900 million in clean tech since 2007 and seeing a return of minus 9.7%:

Dear’s remarks back in 2013 seem to set the tone for many CIOs still today. Watch the full interview video here

We have almost $900 million in investment expressly aimed at clean tech. We’re all familiar with the J-curve in private equity. Well, for Calpers, clean-tech investing has got an L-curve for “lose.” Our experience is this has been a noble way to lose money. And we’re not here to lose money. We have dialed back.

In the same vintage, VC legends Kholsa Ventures and Kleiner Perkins launched $1 billion and $500 million clean tech funds respectively, that both famously failed to live up to expectations.

These and other clean tech misadventures in the early 2000s saw many institutional LPs lose significant money during the first “clean tech boom”. These traumatic events set the tone for the last twenty years and many investors have not updated their understanding of the sector since.

In this overview, I’ll examine what happened in the decade following these flameouts — how did things go from 2010 to 2020?

Let’s examine four cohorts from 2010–2020: Private equity, public large caps, SPACs, and for bonus points…Tesla.

2010–2020: Private PE/VC

Liqian Ma at Cambridge Associates has done some great primary research here¹. From 2005 to 2012, clean tech PE/VC (orange) certainly did trail the broader universe (grey):

Source: Cambridge Associates Private Investments Database. The full report is published quarterly and can be found here

But…what happens after 2012? Here is the complete chart:

Source: Cambridge Associates Private Investments Database. The full report is published quarterly and can be found here. See [1] notes below for more detail on the methodology

Starting 2013, clean tech (orange) roughy matched or exceeded the broader PE/VC universe (grey)! This is pretty remarkable and not widely appreciated. Here is what Cambridge says about this data:

In our database of investment managers, we see evidence that sustainable solutions are driving returns. We recognise the pattern because we have seen it before: consider how falling costs in areas, such as gene sequencing, rapidly fed through to increased investment returns in healthcare venture capital returns. Similarly, we are now seeing large and significant cost reductions in clean technologies. Clean energy technology is now applied beyond the energy industry in areas such as retail, transportation, manufacturing, agriculture, and real estate. Examples include rapid declines in the cost of wind and solar power and battery storage. Such rapidly evolving technology is reshaping the economics of sustainable businesses amid decreased capital chasing deals. Thanks to this combination, the underperformance of the prior decade’s capital-intensive or subsidy-dependent clean technologies is disappearing. Investment returns from cleantech companies held by private equity and venture capital (PE/VC) funds have increased remarkably in the latest vintages

PwC recently published another useful data set in their State of Climate Tech 2020 report.

Some highlights from the report…

  • Investment in climate tech has grown at 5x the rate of the overall global venture capital market: Total investment into climate tech grew 3,750% from $418 million in 2013 to $16.1 billion in 2019 — an 84% CAGR. This growth is seen in both value and the number of deals. For context, climate tech investment is growing three times faster than investment into artificial intelligence.
  • Investment into climate tech for real estate lags behind every other vertical, but is also growing rapidly: climate tech investment into the built environment represents only 6.2% of total investment into the space. The CAGR for climate tech investment into real estate is still substantial — 57% over the last 7 years — but lags behind that for climate tech overall. Real estate is the most penetrable vertical in climate tech because there is so much white space.

In summary…since 2013 climate tech VC/PE:

  • Has matched or outperformed the broader market on a pooled gross IRR basis
  • Has grown 5x faster than the broader market, with $16.9 billion deployed in 2019 and a CAGR of 84% over the last six years.

2010–2020: Public Equities

The Green Giants vs. The Oil Majors

In just a decade, Iberdrola, Enel, and NextEra have grown to become ‘green majors’, rivaling some of the world’s largest oil companies.

Just a decade ago firms like NextEra, Iberdrola, and Enel were small regional utilities that few had ever heard of. Now they are fast-growing large caps with market values rivaling the likes of oil majors Exxon Mobil, BP, and Shell. This chart from The Wall Street Journal illustrates the dramatic relative market cap changes from 2010–2020:

Market Capitalization, $USD Billions. Source: https://www.wsj.com/articles/the-new-green-energy-giants-challenging-exxon-and-bp-meet-nextera-enel-11607696660

This divergence is most stark over the last 24 months. Another WSJ article comparing the recent performance of Big Oil to the New Green Supermajors includes this stunning chart:

In the lead is Enel with two year returns of 104.8% and in last place is Exxon with -37.1%.

In summary…since 2010 Climate Tech large-cap companies, aka The Green Energy Majors, have outperformed Big Oil by a significant amount.

2015–2021: Tesla vs. Everything

In case you have been living under a rock, Tesla‘s recent performance has been breathtaking:

5 year performance of $TSLA (green) vs SP500 (blue) vs NASDAQ (purple)

Many analysts scratch their heads at its current valuation. For example, this chart and commentary from Motley Fool show just how extreme it is relative to the other automakers:

In this author’s (and $TSLA shareholder) opinion, the best explanation for Tesla’s current valuation is that the auto business isn’t the most interesting part of the Tesla story.

Perhaps another way to look at Tesla is that they are leading the way in developing many of the foundational pieces of technology that the world needs for a systematic change to a fully electrified economy.

Telsa is much more than the cars. There is the charging network; there is SolarCity’s residential solar panel/tile products, as well as the solar installer and financing businesses. Tesla is building “gigafactories” in Nevada, New York, Shanghai, Berlin, and Texas to make batteries to power cars, homes, and utility-scale storage project, and they are likely working to vertically integrate the supply chain in front of batteries all the way to the rare earth mines. There is the power electronics business, and there is the utility-scale energy business. Tesla is building all of the critical pieces of tech to make these things work together.

Tesla is today the world’s greatest diversified climate tech company.

I propose that one of the reasons $TSLA has performed in a way that seems to defy its fundamentals as an automaker is that for investors seeking broad exposure to climate tech, Tesla is as close to index-like exposure for the entire climate tech market as one can get in public markets at the moment.

In summary

Climate tech has received a lot of attention in the last twelve months from the venture community and beyond (ex. At Fifth Wall we have climate tech focused Partners and a dedicated investment strategy). Still, it is an area that many institutional CIO’s and LPs we speak with remain skeptical of, often citing their own money-losing experiences in the decade 2000–2010.

However, on closer examination of the last ten years, from 2010–2020, a case can be made that climate tech outperformed its comparables across a wide range of asset classes, including private equity, venture capital, large cap stocks, and, well Tesla. In our view, given the current political and economic tailwinds behind decarbonization that continue to strengthen, we believe climate tech will continue to outperform–perhaps even more significantly–in the decade ahead.

[1] Notes: Performance includes 1,411 investments and reflects gross deal level returns from 2005 to 2017. These investments are composed of all company-level investments made by private equity and venture capital partnerships assessed as eligible for the CA Clean Tech Company Performance Statistics. As of September 2019, Cambridge Associates (CA) screened over 93,000 investments held by over 7,800 funds to identify cleantech investments. CA includes companies and projects in the cleantech sector if they (1) develop non-fossil fuel energy sources, (2) promote industrial efficiency by conserving resources and replacing existing processes with less-polluting alternatives, (3) recycle waste efficiently, or (4) provide a product or service that creates an environmental improvement. Source: Cambridge Associates.

Partner @ Fifth Wall, Climate Tech

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