Being a senior advisor to the firm, I attended last week’s annual meeting of Craton Equity Partners, a cleantech private equity fund manager based in Los Angeles.
While cleantech in its focus, Craton doesn’t take on much technology risk. Rather, Craton generally invests in companies that have largely proven their technologies – or frankly don’t rely much on proprietary technologies – and are already generating substantial revenues, requiring growth capital to build out their business models into sizable scale.
This was illustrated by the stories told by three of Craton’s portfolio companies:
- Propel Fuels, which is developing a critical mass of biofuel retailing locations – by leasing space at existing gas stations, installing necessary equipment for biofuels, managing fuel delivery logistics, and retail marketing via co-branding – across California, with a view towards replicating this model in other geographic markets in the U.S.
- Petra Solar, which has standardized a photovoltaic product for installation on power poles, thereby enabling utilities to meet renewable portfolio standard requirements while also improving the quality and management of power throughout their distribution grids.
- GreenWave Reality, which is aiming to extend the smart-grid “beyond the meter” and into the home, via a centralized radio-broadcasting gateway at the service entrance and a variety of intelligence-enabled radio-controlled applications throughout the home to manage energy usage.
Along with these three presentations by portfolio company CEOs, the Craton senior partners provided their perspective on the state of the cleantech investment markets.
Of note, the Craton partners believe that the collapse of the credit markets over the past few years has yielded good opportunities for its fund to invest equity in companies – some of whom are generating tens of millions of dollars of revenues, and already profitable – that really ought to have been able to secure debt during more normal times, thereby generating attractive risk-return profiles upon which Craton could capitalize. Clearly, Craton was fortunate to have been focused on later-stage private equity opportunities, rather than earlier-stage venture capital opportunities, where the credit crunch has provided no such opening.
The recent addition of Kevin Wall to the Craton team, possessing significant high-level contacts around the world, reflects Craton’s view that many of the best growth and exit possibilities for cleantech in the coming years will occur internationally. This is a sad but entirely legitimate commentary on the state of the U.S. cleantech marketplace: if you want to really do well in cleantech investing in the next several years, you’re going to have to focus a lot of attention overseas.
Consistent with my personal experience, the Craton team noted that the key success factor for their portfolio companies continues to be management quality. Fortunately, they are seeing (as I am) an influx into cleantech of a greater quantity of better talent in the past few years. Of course, this is in part driven by deteriorating economic conditions and opportunities in other sectors of the economy. But, I also sense it’s because many capable people are increasingly drawn to cleantech for other intangible attractions. (I was recently on the phone with an old friend of mine who made a lot of money in real estate and didn’t find it challenging enough – so he’s moving into cleantech. Five years from now, I’m sure this friend of mine will not complain that making money in cleantech wasn’t sufficiently challenging!)
On the whole, it appears that Craton's first fund is doing generally well, and the firm is beginning to prepare for raising its second fund. The question will be whether Craton's good performance on paper (no liquidity events yet) will be able to overcome a very tough fund-raising environment. Given their strong relationships in the California marketplace – where cleantech has the most traction of anywhere in the U.S. – Craton's progress in the coming 12-24 months will be a good barometer of the health of the cleantech investing thesis in the U.S.
