Venture Capital Dispatch

EnerTech Capital raised just under $120 million for its fourth fund focused on investments in later-stage venture and growth-stage companies in the energy technology space in the U.S. and Canada, as VentureWire reported this week

Wally Hunter says companies like Solyndra became overvalued, but plenty of good opportunities remain in clean technology.

We spoke with EnerTech Managing Director Wally Hunter, who’s based in the firm’s Toronto office, about why there are more Canadian and fewer Middle Eastern limited partners in Enertech’s new fund, how he stayed away from Solyndra, where new energy technology opportunities lie, and why the oilmen’s club in Calgary may be a good place to find deals.

The conversation is edited for clarity and length.

WSJ: Venture fund-raising in general is weaker this year, and firms that focus on clean-technology are having a particularly hard time raising new funds. What was it like raising this fund in this challenging market and what do you think worked in your favor?

Mr. Hunter: The fact that we stayed broader in energy technology was helpful to us. Clean-tech is part of energy tech, in our view. But we are not going to shy away from oil and gas technologies, where you are helping extraction of hydrocarbons, for example. People who were looking at pure clean-tech were seeing a lot of flameouts.

WSJ: What are the major market trends that are opening opportunities for the current batch of energy-tech companies?

Mr. Hunter: If you look at traditional oil and gas you see a lot of fluids in the process that you need to clean up and remediate. There’s also work on new materials that could make the tools used in horizontal drilling more effective. There’s a lot of monitoring technology around pipelines. The focus on the Keystone pipeline has been around it going through environmentally sensitive areas. When you have a negative like that, there are opportunities. There are technologies, for example, that allow you to monitor the thickness of a pipeline and alert you when it starts to wear out. These kinds of technologies solve a big environmental risk, but they are not driven by a government subsidy.

WSJ: What are the lessons learned in clean-tech investing from the past few years?

Mr. Hunter: The investments that didn’t work were the ones where people got caught up in the hype that this is going to be the next big billion-dollar IPO. It’s harder to have Googles in this sector. It’s just not necessarily the type of thing that happens in this sector.

WSJ: You closed your last fund in 2007. Since then the market changed significantly. Some other investors, for example, are less interested in energy tech than they were previously. What’s the co-investor landscape like for you now?

Mr. Hunter: I would say that the landscape changed. You had a lot of broader funds that were stepping into clean-tech as well. They didn’t understand how a utility pays and didn’t have capital available to do follow-on rounds. The returns on a few of their deals weren’t great for a lot of them.

The funds that are left, who made it through the cycle, are the ones that have better domain knowledge in energy. We are happy to have fewer co-investors, but ones that understand the space better. The market has been purified, and there are some very good players out there like XPV Capital and 32 Degrees.

WSJ: Now that there are fewer funds going after deals, how has that affected valuations in energy tech?

Mr. Hunter: The valuation metrics are far better right now and in particular in Canada. There aren’t as many players as in the U.S. Back in 2007, 2008 there was a whole bunch of new funds that were just raised. We saw deals that were overpriced and we passed on. On some we were proven wrong, but on a lot of them, we were right. We didn’t get into Solyndra.

WSJ: A greater proportion of your limited partners this time around are in Canada — what accounts for their interest?

Mr. Hunter: Because of the strong energy nexus here and the fact that overall the Canadian economy was coming along — there were no big casualties, even when the U.S. was in the big meltdown —  confidence in putting money in venture was still there. I’m also well-known here. We hired great people in Montreal and Calgary, who have a known history and track record. So LPs could check that box.

WSJ: At the same time, there are fewer Middle Eastern limited partners in this fund, why is that?

Mr. Hunter: I think the Middle East went through the same fluctuations as the U.S, and in some ways more so. They deployed a lot of capital in ‘07 and ‘08 in less liquid type investments, and when the market fell apart, there was a big pullback from private equity by a lot of those funds.

WSJ: How are you using your growing strength in Canada to your advantage, besides attracting LP interest?

Mr. Hunter: The advantage of having boots on the ground in, say, Calgary, is huge. If you are an outsider, you are often not brought into the best deals frankly. You will get the good deals sitting in the oilmen’s club. If you are flying from Silicon Valley and think you’d get access to those deals, you are dreaming. They are used to doing deals where four or five individuals put a million each. Then they say: “So, who do we know who does venture?” And they go to that group first, because they are the ones at the cocktail reception together. It’s the same in Quebec.

We are now getting a very large number of calls from top-tier VC funds that say they want to start looking in Canada. The government changed some of the tax structures to make it more attractive for U.S. money to flow in. In the energy space that’s opened a lot more interest into Alberta, for example.

Original Article

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