BDC lags when it comes to cleantech investing
Crown corporation's focus on AI, information tech, other tech verticals
BDC Capital, the venture funding arm of the Business Development Bank of Canada, has invested less than 40 per cent of its Industrial, Clean, and Energy (ICE) Technology Venture Fund in cleantech firms since launching the fund in 2001, according to Pitchbook data, with the bulk of its investments from the fund in companies focused on artificial intelligence, information technology, electronics and other tech verticals.
The fund's record underscores the long-standing challenges BDC has faced in finding investment opportunities in the sector even as the federal government looks to the firm to bolster Canada's fledgling cleantech industry.
Of the 34 firms funded through ICE, 13 are in verticals related to climate and clean-energy technologies, Pitchbook data shows.
BDC spokesperson Flavie Côté told The Logic that “two-thirds of the ICE fund can be considered cleantech.” Côté would not say which of its portfolio companies BDC included in that category.
Across its portfolios, BDC has invested in 25 cleantech deals since 2002, according to data from Pitchbook. BDC would not disclose how many cleantech companies the firm has invested in across its various funds.
The limited exposure to cleantech in its portfolio coincides with a spike in losses in the Crown corporation's Cleantech Practice fund, a $600-million pool from the federal government meant to support startups in the cleantech space. The Logic reported last year that BDC had struggled to find suitable investment opportunities for the government-sponsored fund, and began screening in startups that wouldn't otherwise qualify for the program. In fiscal 2020, BDC reported $11.4 million in losses for the fund, down from a $6.6-million deficit the year before. The corporation attributed the losses to a drop in asset value in the portfolio.
BDC told The Logic it has invested in 30 cleantech deals through its Cleantech Practice, 25 of which it lists on its website.
The Crown corporation's performance in cleantech investments is at odds with broader industry trends showing increased activity in the sector over the last decade. Venture capital in Canadian cleantech companies grew 192 per cent during that period, from $185.7 million in 2010 to $541.1 million so far this year, according to data from Pitchbook.
Funding dollars have increased with the surge in cleantech business in recent years. The market in Canada grew 6.6 per cent from 2016 to 2017, about double the total GDP growth that year, and the sector now represents about 1.4 per cent of Canada's nominal GDP. At the same time, however, the gap between demand and availability of capital has widened.
In a document prepared for Innovation Minister Navdeep Bains before launching the Cleantech Practice fund, BDC noted high capital requirements, a longer path to profitability and limited institutional investors for cleantech firms as barriers to closing the funding gap.
“The big problem with Canadian companies is to make sure they have a large enough round of financing at each level, including Series A, B and C,” said Andrée-lise Méthot, founder and managing partner of Cycle Capital Management, a Montreal-based cleantech-focused fund. “What we found a few years ago was that the U.S. entrepreneur would receive five, six, seven, 10 times more money at the same level of funding (than Canadian firms).”
Méthot said she's seen the dynamic play out for startups and scale-ups in every vertical. However, according to Gregorio Oberti, a partner at PWC covering cleantech, the funding gap can be particularly challenging for cleantech companies, given the high cost and complexity of getting many of their products and services to market.
“What you're fundamentally dealing with when it comes to cleantech is real assets,” said Oberti. “Unlike pure technologies like software or hardware, in the cleantech space, you may be doing a solar farm or creating a clean fuel or doing water management — some kind of infrastructure. There's a multidisciplinary nature that involves engineering, manufacturing, finance, insurance that's utterly required to pull one of these projects off,” he said. “That's capital-intensive.”
At the same time, the federal government has made supporting cleantech a priority for the country's transition to a net-zero-carbon economy. To that end, it allocated nearly $1.4 billion in Budget 2017 to help finance the sector, including the $600 million for BDC'S Cleantech Practice fund and $400 million for Sustainable Development Technology Canada.
Oberti said cleantech startups and scale-ups may require longer investing timelines and more risk tolerance than typical venture capital-backed companies. BDC agreed to increase its risk tolerance for deals made through the federal cleantech fund to account for the sector's needs.
In its final report published last year, the Expert Panel on Sustainable Finance noted, “Commentators in the cleantech space … cite inconsistencies and gaps between the high-level public objectives to promote cleantech innovation and the perceived priorities and flexibility to act under existing risk mandates.”
The panel, led by now-bank of Canada governor Tiff Macklem, called for the federal government to review its programs and agencies meant to boost the sector to “ensure that risk mandates (and underlying incentive systems) encourage longer-term investing and balance financial return objectives with broader environmental priorities, particularly as they relate to national priorities.”
Despite losses in its Cleantech Practice, the program has increased BDC'S exposure to the sector. Since launching the fund in 2018, BDC has invested in nine cleantech-specific firms out of the 25 total it's financed in the past 18 years, according to Pitchbook. It made five of those deals in 2020, after making none in 2019.