New Energy Fund Looks to Clean Up in China

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New Energy Fund Looks to Clean Up in China
Jim McDermott and Kefu Fu.

In an odd twist, China – better known for gray air and metallic rivers – could became a inviting market for American-made clean technology.

Take the case of U.S. Renewables Group, a Santa Monica private equity firm launched in 2003 amid what looked like a boom in domestic clean energy. Not long after, the economy crashed, huge natural gas deposits were discovered and the guys at Renewables found themselves flying to points as far as Beijing and Johannesburg looking for clean-energy projects in which to invest. They spent several years investing in foreign projects.

Now, Renewables is trying to find American companies that are developing alternative energy technologies in an effort to bring them to the booming Chinese market.

“Because of the cycle, a lot of companies that otherwise would have been funded have found themselves in difficult spots,” said Jim McDermott, a managing director at Renewables.

Not only did American companies struggle to get funding, they were also forced to adapt to their customer base not being in the United States.

“A lot of them were started with the idea that they’d just sell domestically and they had to pivot to selling internationally,” McDermott said.

McDermott and his team had to make that same pivot, which motivated them to form a partnership with state-owned Shanghai Industrial Investment Group Co. to launch a yuan-denominated clean-energy fund in China. The plan is to give American clean-tech companies a boost by bringing their products to the sizzling Chinese renewable energy market. McDermott named a longtime associate, Kefu Fu, as its general manager, and the fund received its management license from the Chinese government April 2.

Cheap energy

A few years ago, investors in renewable energy felt it was just a matter of time before it took off in the United States. Wars and instability in the Middle East had made oil more expensive. The developed world continued to burn energy and emerging markets were ready to supercharge their economies – and needed more power to do so, putting upward pressure on energy prices. That’s what inspired McDermott and fellow Managing Director Lee Bailey to start Renewables.

Then the economy crashed, which depressed demand for energy. About the same time, hydraulic fracturing, or fracking, opened up a huge source of natural gas in North America, driving prices down.

However, in countries that haven’t felt the fracking boom, renewable energy is being boosted by simple economics.

“Project finance for renewable energy projects internationally is very robust,” McDermott said.

A lot of foreign markets without access to cheap gas rely on oil for power. Their power costs are based on oil prices, which remain higher than the cost of renewables nowadays.

Even in California, which regulates fracking and is providing incentives to use more renewable energy, fossil fuel costs are low enough to make alternative energy a tougher sell.

Meanwhile, China has been the biggest and best example of international investment in clean energy. According to data from Bloomberg New Energy Finance in New York, China draws 29 percent of clean-energy investment from developed countries, attracting a record $54.2 billion last year, the most of any nation.

China also installed 12 gigawatts of solar capacity last year, more than quadrupling capacity from the previous year and becoming the first country to add more than 10 gigawatts in one year.

When the Renewables managers realized the Middle Kingdom was at the heart of the clean-energy revolution, they were fortunate enough to have an entrée. McDermott met some Shanghai Industrial executives three years ago through mutual relationships and was immediately intrigued by the possibility of working with them. Renewables, No. 25 on the Business Journal’s list of the largest private equity firms in Los Angeles, and Shanghai Industrial finally decided to take the plunge and launch the clean-energy fund in April.

‘Gold star’

McDermott and Bailey had started up several funds in the United States but faced a learning curve in their first Chinese venture.

In the United States, practically anyone can start a fund but very few succeed. In China, it’s very hard to get a fund management license, but once that happens, a fund is almost certain to make it.

“Getting through the licensing process in China is arduous, with very little visibility into what the regulators are doing,” McDermott said. “But when they come out the other side and give you the big gold star of a fund management license, it’s sort of like getting a telecom spectrum license. It’s a government monopoly.”

After lagging the West in terms of clean energy, China’s need to catch up might be an asset in attracting investment for developing new technologies. Americans using cheap and fairly clean natural gas aren’t in as much of a rush to install solar panels as Chinese residents choking on polluted air.

McDermott said that, as with telecom, China wants to take advantage of Western advances and jump to best-in-class technologies.

“Show us a concentrated solar power plant with storage,” he said. “In some respects, that’s an easier sell.”

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