Is there anybody out there – the void in ESG funding

A lack of risk-willing, capital heavy growth investors is a key hurdle in Europe’s push for a green transition, Danish industrial cleantech scaling fund Nordic Alpha Partners’ (NAP) co-founder and growth partner Laurits Bach Sørensen said.

“ESG and Impact Investing matters very little when the single biggest obstacle for the EU to achieve a successful green transition is the lack of funds and investors in the bracket between early stage and buyout funds,” Bach Sørensen told Mergermarket. “Those with sufficient capital are too risk averse [and] those with risk appetite do not have the capital.”

Unlike in the early stage when the capital required to build some test facility to proof a concept is limited and risks thus smaller, growth funds which finance more mature businesses are faced with the much larger capital expenditure to scale the business properly, and therefore with larger risks, Bach Sørensen explained.

Cleantech and greentech businesses are particularly risky because their technologies and markets are often subject to new and changing regulation. Few European funds, therefore, invest in that segment between the early stage and the buyout stage, so sector companies struggle to fund continued growth, Bach Sørensen said. “It’s a valley of death for the green transformation,” he argued.

The green transition is only possible through technological innovation, Bach Sørensen said. But despite a vast financial ecosystem at work – including early-stage climate funds, ESG-conscious institutional investors and subsidising governments – the gap between early-stage investments and buyout capital remains a hurdle, he said.

In 2021, McKinsey estimated that Europe would require EUR 28trn of investment across transitory sectors and clean technologies over the next 30 years in order to reach net zero.

“There is a responsibility upon the alternative investment community to support the world’s green transition, and currently there is a gaping void in which promising green and cleantech companies die, because no investors are able to take them to the next level once they pass this early growth stage,” Bach Sørensen said.

When listing is the only option

As an example illustrating the lack of mid-stage funding, Bach Sørensen pointed to NAP’s portfolio company Re-Match [CPH:RMATCH], a specialist in the recycling of decommissioned sports turf which listed last year.

Artificial turf is becoming more popular, with more than 42,000 football fields being installed globally last year, as it allows sports to be played regardless of climate and maintenance. But after the lifespan of around 10 years, the turf has until recently had to be disposed of via incineration or landlls, harming the environment. In Re-Match’s factories, much of the material can instead be reused, signicantly reducing CO2 emissions, Bach Sørensen said.

Each Re-Match factory costs around EUR 10m to build but generates EUR 3m – EUR 4m EBITDA once operational. Each factory also saves the atmosphere from 100,000 tons of CO2 compared to alternatives such as incineration. Yet, financing has remained scarce due to the capex intensive nature of the business and the associated risks, Bach Sørensen said, adding that it was due to a lack of syndication partners that NAP chose to list the business. After going public, Re-Match earlier this year sought funding via the debt market, as reported.

Another example is Green Hydrogen Systems [CPH:GREENH], for which NAP raised DKK 1.1bn (EUR 148m) when it listed it in June 2021. “Green Hydrogen Systems needed extensive growth capital to become a key player in the global green energy transformation and to ensure we kept the asset in Danish and European hands, the only option was a public listing,” Bach Sørensen said.

Overall, NAP’s portfolio has already abated the world of 730,000 tons of CO2 equivalents and counting, Bach Sørensen said. This number will rise to more than 2.5m tons annually by 2026, which is roughly 10% of Denmark’s carbon footprint for the year, he added.

Going forward, NAP has received a high level of interest from new LPs, with many players in the international investment community starting to realise that it has a very strong position in this space, Bach Sørensen said. Sectors such as energy technology, sustainable manufacturing and recycling in general are areas where NAP is experiencing high deal flow, he said.

Bridging the gap

If the alternative investment community is to solve the acute nancing issues, “the key thing is to find the right balance between fundraising, financing, regulation and economic sustainability on free market terms,” Bach Sørensen said. “There is urgency resting upon us all to nd the necessary solutions”, he argued.

“If we do not solve the challenges mentioned above, we risk having an inefcient economic transition that will affect our socioeconomic outlook and our prosperity overall in a very negative way,” Bach Sørensen said. “Private equity firms are the key to a successful green transformation…but there is a fundamental gap in the ecosystem that we must and a way to bridge if we are to make lasting impact on the sustainability agenda.”

by Gustav Hoejmark-Jensen in London

23 September 2022

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