For companies seeking a capital injection to finance further growth, costs are a lot higher than they were two years ago. At the same time, the energy transition has ensured that funding demands are at unprecedented levels. This is the market reality for the ABP Netherlands Energy Transition Fund (ANET). Four years after its inception, we take stock with Fund Manager Jeroen Schreur, Expert Portfolio Manager Martijn Olthof and Senior Portfolio Manager Lodewijk Meens. “In the last four years, the investment proposals we receive, have fortunately become more realistic.”
ANET is an investment fund set up for ABP that focuses on companies that contribute to the energy transition. More specifically: Dutch companies that contribute to all aspects of the energy transition and European companies that contribute to the Dutch energy transition. Because, for example, they have a specific innovation or product that is ideally suited to the Dutch situation. ANET was launched in 2019, initially with a commitment of 50 million euros from ABP; a sum which was later increased to 250 million euros. However, it will be some time before this amount is fully invested.
How much of that 250 million euros has ANET already invested?
Schreur: “Currently, ANET has committed around 100 million euros, about 60 million of which is already invested. We have 40 companies in our portfolio (see box, ed.). Four of these are direct investments: NET2GRID, Soly, VIKTOR and Triple Solar. We also invest in start-ups and scale-ups through three funds: Asper Investment Management, Rockstart and Energy Impact Partners. Several of the companies in our portfolio are now due for a second round of financing. We helped these companies arrange their first external funding, and they have since grown to the point where they need more investment to finance further growth. An increasing proportion of our portfolio is now made up of companies at this stage of development. But we don’t yet really know whether we will achieve our growth path for this year in terms of new investments. In the course of the last year, we screened a number of companies that we would like to have in our portfolio, but for various reasons not all of these have yet resulted in concrete investments.”
What are the reasons for this?
Schreur: “Sometimes another investor puts a higher valuation on an investment; is prepared to pay more, or offers more favorable terms. In other cases, we received certain information about a potential investment at too late a stage, so there was no longer full transparency. When that happens, we withdraw.”
Olthof: “Ultimately, there are a lot of reasons throughout the selection process why a company might fail to make it to the next stage. We have a very large funnel and ANET is now so well-known in the market that we receive many proposals; are shown many major deals. But sometimes these just don’t fit our mandate. For example, they might be too big, too small, or have an insufficiently strong link with the energy transition or the Netherlands. Or the business model is simply not interesting enough, for example, because it is based on technology we don’t believe in.”
Meens: “Of course, the broader changes in valuations over the course of 2023 have also played a role. Many company founders think it’s still 2021 or 2022 and have expectations in terms of valuations that we are not prepared to pay. In such cases we put a proposal on hold and may have the conversation again six months later when the numbers are different.”
What percentage of the deals you look at actually end up in the portfolio?
Schreur: “There’s sort of a rule in the venture capital market that about one percent of what comes along ends up in your portfolio. For ANET, that’s about two percent. Basically you have to see a lot of these kinds of deals to be able to pick out the good ones. It is a combination of the opportunity in the market, the team, the product-market fit and the financials. The whole thing has to be absolutely right, and it also has to be operationally sound, of course. This makes it pretty difficult for a company to get into our portfolio. But once it has got through the selection process, starts to grow and at some point needs new financing - like Soly - we take that seriously.”
What are your expectations of the companies you invest in? When is a second round of financing worth considering?
Meens: “The rule of thumb for our direct investments is that they all start small. This means companies with revenues of five to ten million, or at most 15 million euros. Then we come on board, hopefully by making an attractive investment at a competitive valuation, of course. And two years further on, the company’s revenue should be 100 million euros or more. At this stage the companies still don’t really have to be profitable. They are not yet large or stable; they are fast-growing companies that need capital to take the next step.”
Can you give an example of how a company takes a step like that?
Schreur: “When we first invested in Soly, the company was basically installing solar panels in the Netherlands. With the capital we provided, they added batteries and EV chargers to their product range and developed a home energy management system to optimize domestic energy usage. They also looked into offering dynamic energy contracts. In the Netherlands, they offer all this in one package and have made the transition from solar panel installer to a utility of the future. Now they are ready to roll this out internationally, to the UK, Germany, Italy and so on. And the second round of funding will be used to scale up their activities.”
Is participating in the second round of financing to such a venture a less risky investment?
Schreur: “No, there are still a lot of risks involved, partly because each country has its own dynamics. But the way Soly has organized their marketing and the control they demonstrate within the organization give us confidence in their ability to also roll this out successfully internationally.”
Are there any companies in the portfolio that now have stable annual sales and profits?
Meens: “Our competitors, the venture capital funds, have a time frame of seven to 10 years in which an investment goes from baby, to teenager, to adult, and finally goes public, or is sold to a strategic party. So, for the companies in our portfolio, it will take another four, five years to get to that stage.”
You already mentioned that valuations in the segment where you look to invest have fallen in 2023. What other developments are you seeing in the market?
Olthof: “One interesting development is that the energy transition is now entering a phase where more capital is actually needed. More and more proposals are landing on our desk from companies that are quite small but have a relatively large capital requirement because so much new infrastructure is required. For example, many more charging stations, batteries, wind turbines or solar panels.”
Schreur: “The proposals have also changed over the last four years, also in terms of their capital requirements. Now we get realistic proposals with realistic investment amounts, for operations run by professional management teams.”
Meens: “The big difference compared to a few years ago is that geopolitics has also changed enormously and industrial policy has adapted accordingly. For example, the Inflation Reduction Act has made billions of funds available to lure companies to the US. In Europe, the REPowerEU plan, and in the Netherlands, the Growth Fund have billions set aside for solar energy and batteries, for example. As an investor, you also have to start taking this into account as well. It is good news if you get a subsidy, but it’s bad news if you don’t and your competitor does. This makes it a little trickier. The fact is that, partly because of the war in Ukraine, the amount of state aid and state support has ballooned. In addition, there is an investment hype for anything related to AI or the energy transition. But the question always remains the same: Is this a realistic concept and will it be viable? Will this investment eventually create cashflows? Ultimately it all boils down to being able to look beyond the hype; that is the biggest challenge we and our competitors face.”