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Equity finance can complete the loop for sustainable projects

30/03/2007

Private equity has had a bad press recently, following a number of criticisms of the way it works. Finance providers have been described as unaccountable and blamed for forcing the businesses they invest in to be run on the basis of short term horizons.

Now, even some pension fund managers have joined in the chorus of dissent, which was originally led by trade unions.

Mark Anson, chief executive of Hermes Pensions Management, is quoted as saying: “We do have some concerns when we see private equity making investments that may not be in the long term interests of the general public.”

Others disagree vehemently and a study by Nottingham University’s Centre for Management Buy-out Research has suggested that private equity is beneficial for employment and staff empowerment.

Roger Blears, senior partner at Birmingham and London law firm Martineau Johnson, is an expert on a particular area where equity finance is proving to be a major force for good.

“We are seeing much more interest in investing in companies with environmental aims and there are many more businesses with such objectives seeking financial backing.

“This trend is going to accelerate, and I believe that private equity injections can make a real difference to the environment, by acting as a catalyst for the growth of these companies.

“Often, there is government assistance available through publicly funded initiatives and such finance can go hand in hand with private equity to move the business forward.”

The interest in sustainability has mushroomed in recent years to the point where Sir Richard Branson felt able to commit to £1.6 billion of investment in renewable energy over the next decade.

Mr Blears, who is also a director of Foresight 2 VCT, managed by Foresight Venture Partners (FVP), one of the leading fund managers in its field of backing emerging businesses, cites the launch of FVP’s Sustainable Investment Fund earlier this year as another sign of the significance of investment in the sector.

“Far from being the niche investment it once was, sustainability is attracting investors from a wide range of backgrounds, and the seriousness of the issue of climate change will help to secure potentially huge returns for some businesses.

“What’s more, staying with unquoted companies maximises the potential for high returns for investors getting on board early in their development”, said Mr Blears.

“These investors make the real returns, and they are often best placed to achieve the tax benefits of investing, such as the Enterprise Investment (EIS) Scheme.

“Apart from the Foresight Sustainable Investment Fund, a number of other funds are around, including a venture capital offshoot of the government-backed Carbon Trust.”

The businesses looking for private equity investment in the sustainable sector include those in biofuels (alternative fuels to oil, based on plant material) and renewable energy including wind power and recycling.

FVP manages a number of Venture capital trusts (VCTs), which are like investment trusts but with tax benefits for investors. These VCTs are often the vehicles for investing in sustainable businesses.

Martineau Johnson recently played a key role in connection with the finance for a plastics recycling plant. This pioneering facility for the recycling of plastics for food packaging, is to be built by Closed Loop London (Closed Loop), a company well known for its groundbreaking initiatives in recycling.

FVP brought together its VCT funds and a syndicate of private and small fund investors to invest a total of £4.6m in Closed Loop, a cash injection which will enable the environmental specialist’s recycling plant to be built on land at Dagenham in Essex.

This will be the first UK recycling plant of its kind to produce recycled material suitable for food packaging. The plant will be able to recycle PET (polyethylene terephthalate), which is a clear plastic used in soft drinks containers. Until now, it has been largely sent to landfill or exported to Asia for low-grade industrial re-use.

Marks and Spencer is the first major retailer to commit to sending plastic waste from its London stores to the Closed Loop plant. It will also encourage suppliers to source recycled PET from the plant to use in packaging.

Mr Blears, who has a special interest in equity finance for fast growing business, said: “VCT and EIS investment can play a pivotal role in securing the future development of companies like Closed Loop.”

“Such businesses could otherwise find themselves victims of the so called ‘equity gap’, the size range in which businesses find it difficult to raise equity finance.

“In the case of Closed Loop, the finance provided has enabled the business to tap into government support and bank debt to move forward,” said Mr Blears.

Some City experts have compared the boom in sustainable investment with the ill fated high tech boom of the late 1990’s, when billions of pounds were invested and lost in peddling untried technologies of dubious promise.

“There is no parallel with the dot com bubble,” said Mr Blears, who adds: “The drivers for the sustainable sector development are much more robust and compelling.

“Investment in areas such as recycling will be the utilities of the future, developing into defensive investments with excellent returns in terms of income streams.

“We see sustainability as a key investment area and the private equity investment industry is well set up to contribute to the environment.”

For further information please contact Roger Blears on roger.blears@martjohn.com