20 October 2016
China can't afford to rest easy on clean-energy projects given the dismal air quality in most big cities. Photo: Reuters
China can't afford to rest easy on clean-energy projects given the dismal air quality in most big cities. Photo: Reuters

PE firms take a fresh look at China environment-related projects

The Chinese government has devoted a lot of effort and resources to promoting clean energy and implementing tougher environmental protection rules.

Such initiatives have, however, unfortunately led to oversupply in many industries related to clean energy.

Many private-equity (PE) firms suffered from investments in those industries since 2011, resulting in less PE investment in this area in the following years.

That said, demand for environment-related services is still big in China. Hence, many PE funds are starting to look afresh at the sector.

In previous years, PE firms invested a lot on sewage treatment, new energy and waste incineration projects.

In the early days, China was lacking waste treatment systems and had been using the technologies that developed countries used in an earlier period.

Frankly speaking, the “outdated” technologies were enough for an initial stage of environmental protection.

If a simple and mature technology fits China, while also providing good returns, PEs wouldn’t take the risk to invest in advanced ventures that might require massive investment. Thus, water or waste treatment plants were their natural choices.

But now, many of the quality water and waste treatment plants are controlled by big state-owned capital or foreign investors.

For example, Hony Capital bought 10 percent stake in Shanghai Chengtou Holding Co. for 1.8 billion yuan.

Also, many PE firms began targeting projects in lower-tier cities after the big players grabbed most of the opportunities in top-tier cities.

Qiming Venture Partners recently made an investment in CSD Water Service Co., which focuses on water treatment business in the underserved third- and fourth-tier cities in China.

PE firms are now more interested in technologies like new green materials, energy efficiency improvement, air purifying and advanced waste treatment, given the limited number of quality projects and the oversupply issue.

Shenzhen Capital Group has injected US$1.6 million to a company which makes electric car charging and operation facilities.

KKR and CITIC invested in United Envirotech, which is involved in some important water treatment technology.

PE investors, both big and small, are now favoring high-tech environmental protection firms.

This article appeared in the Hong Kong Economic Journal on Feb. 25.

Translation by Myssie You

[Chinese version 中文版]

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Director at Spring Capital

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