Oct 07, 2018
If you’ve lived in Beijing in the past ten years, you’re probably familiar with the sensation of drinking boiling hot water during the summer and breathing through a thick white mask during the winter.
More than half of the water in China is considered unsafe to drink, and 16 of the top 20 most polluted cities in the world are located in the country, according to the Brookings Institution.
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The central government has positioned environmental regulations as an important part of its national objectives. In the 13th Five-Year Plan of 2016, the government outlined its goal of reducing CO2 emissions per unit of GDP by 18 percent and energy consumption by 15 percent from 2015 levels by 2020.
China’s push for new energy correlates with increased investment in those industries from 2014 to 2017. That effect is further evidenced by the fact that China’s electric vehicle sector, cushioned by government subsidies, has grown significantly over the past few years.
One fund, the U.S.-China Green Fund (USCGF), is betting that the severity of those challenges and the efforts needed to overcome them create the potential for impactful, profitable business investments.
Green Growth Through Private Equity Investments
Founded in 2016, the U.S.-China Green Fund (USCGF) is a China and (soon-to-be) U.S.-based private equity firm that aims to capitalize on the new energy and environmental movement to both accelerate the growth of existing businesses in China, while connecting clean technology companies in the West with China’s market potential.
On the China side, the fund is particularly focused on making majority, private equity investments in growth-stage businesses through its Renminbi (RMB) fund, which is targeted at about 3 billion yuan, or about $430 million.
With the help of its technology research institution, USCGF targets companies that have access to what it calls the green energy, green manufacturing, green consumption, and green transportation sectors.
The fund looks at companies that have deep access to channels in China and that have the potential to increase their green impact through the introduction of better technology, improvement of business strategies, and partnership expansion. That means that USCGF is very hands on.
“We are not a reactive, passive investor. We are proactive from the very beginning to the very end,” CEO of the U.S.-China Green Fund Bo Bai told Crunchbase News. He added that the firm dedicates itself to 30 percent pre-investment, and 70 percent post-investment management.
Two of the company’s investments, namely East Low Carbon and HosJoy, are looking to address China’s energy consumption and efficiency.
East Low Carbon
Founded in 2011, East Low Carbon (ELC) provides large businesses and facilities with consumption reduction and management, equipping their buildings with smart controls, energy efficient lighting, heating, and AC and other renewable-energy based systems. The company first received an investment from the U.S.-China Green Fund in 2016, which became the majority shareholder in the company. Annie Zhou, USCGF’s Director of External Affairs, told Crunchbase News that since then the firm has connected the company with new partners beyond hospitals and small hotels.
“Through our investment […] we’ve helped them to partner with large industrial companies like General Electric, where they’re now working on industrial energy efficiency, as well,” Zhou said.
The company has also expanded to supermarkets and has doubled down on its hotel management partnerships in China, signing contracts to equip Hyatt, Four Seasons, and other partners with energy efficient facilities.
USCGF has also invested in a company working on building sustainable family homes.
Founded in 2009, Hosjoy targets energy consumption and smart systems for residential homes.
“In China, many times when you renovate you have to find one person to [upgrade] the air conditioning, another person from the heating company, and another for air purification,” Bai explained. “That’s a pain.”
Hosjoy is aiming to solve that consumption upgrade problem through its app, which allows individuals and families that are buying or renovating a home to view and order preferred products from the company’s network of stores. It specifically works on supplying products for air conditioning and heating, air and water purification, and smart control systems.
USCGF says Hosjoy has serviced over 300,000 homes and its stores are present in 86 cities in 15 provinces in China. The firm invested RMB 800 million into the company in 2017, and Bai says the company officially reached unicorn status after closing funding earlier this month.
Beyond Hosjoy and East Low Carbon, USCGF has made an investment that relates to the new energy vehicle space. AIPark is a smart parking company that allows its users to locate garage and on-street parking, potentially alleviating the immense traffic jams that occur in large cities.
The investment in AIPark was atypical–USCGF invested in the company’s 100 million RMB (approximately $15 million) Series A. But Bai says that the early stage investment was the result of the firm’s due diligence on the startup.
“Twelve months passed between the first time I talked to the company and the time that I invested,” Bai explained. “I saw it tested in a few small cities and I saw it tested in larger cities with 8 million people, and I realized that the technology and the company’s business model would work.”
Bai says that AIpark has since secured a contract to implement its technology in two-thirds of Beijing, a city of 30 million people.
Although the firm has invested in a startup with potential for growth alongside the new energy vehicle sector, it has explicitly decided not to place its eggs in that government-subsidized basket.
The U.S.-China Green Fund And Its Government Connections
The team believes any investment that USCGF makes “needs to make sense without government subsidies,” according to Bai. And the electric vehicle market has been famously boosted by the Chinese government over the past few years.
Bloomberg has reported that some experts expect just one percent of the electric vehicle companies in China to survive, specifically as the country begins to scale back subsidies like tax exemptions. Bai, who had been following the electric vehicle space since 2006, said the manufacturing costs combined with inflated support dissuaded him.
“It’s a very exciting area, but from a risk-reward perspective I was uncomfortable,” Bai told Crunchbase News.
On the other hand, the firm also emphasized the importance of working with the government, specifically as it relates to the benefits that it can bring portfolio companies, like AIpark. Further, the fund’s backers include government bodies.
“It’s really hard to be completely disconnected from the government in China, where there are lots of state-owned entities,” Doug Cameron, the Senior Managing Director of USCGF said. “We have a few private companies in China that are investors in the fund, but we also have some regional and some city governments that are investors in our current fund.”
Still, though, Zhou says that when looking at potential state partnerships, the fund does not move forward with government partners that are not fully committed to partnerships or building teams and supporting technology development.
“It would be good for us, right, to say that we’re working with the government of Shanghai or Chengdu, of course,” Zhou said. “But if the cities themselves are not driven by the right [motivations] or criteria to meet these low carbon targets, then that’s not a good partnership.”
With the Chinese government and China-based companies open to new technologies, the U.S.-China Green Fund is betting that western-based cleantech companies will be the perfect fit.
The West Tapping Into China’s Greening Market
The U.S.-China Green Fund is also aiming to provide western-based cleantech companies with access to China, a market that is prioritizing green tech. Cameron, who leads the firm’s efforts outside of China, articulated the fund’s mission on the global end.
“We are not about trying to build stuff cheap in China so that we can send it to the West,” he said. “We are about addressing environmental challenges in China and finding great technologies in the West that could grow to be even bigger, stronger companies if they were able to tap into the Chinese market.”
The firm makes venture investments in startups of Series B or later that have already developed their technologies. Unlike on the China side, USCGF does not prioritize majority investments.
“[Our western investments] don’t have to have huge sales, and they don’t have to be profitable, but we don’t want to take on technology risk,” Cameron said.
To that end, the U.S.-China Green Technology Research Institute based in Shanghai focuses specifically on assessing whether potential investments are mature, more innovative than what already exists in China, and applicable to the Chinese market.
“We compare the technology to other similar technologies to see if it’s the most viable from a commercial perspective,” Dr. Zhu Wu, the Director of the Institute told Crunchbase News. “Ultimately we want to make sure that the technology is market driven.”
Finally, USCGF focuses on providing its western investments with a value-add beyond supplying them with capital.
“If we invest, we want to make sure that our channels to market in China are valuable for the company,” Cameron expressed. “With every investment we make in China, we improve our understanding and our market access in China. So it’s a dynamic situation.”
Cameron pointed to one of the firm’s China-based investments, HuiTongDa. The company has created a network of more than 90,000 mom-and-pop shops in rural villages in China through its ecommerce network.
“This provides a great channel to market for products and sustainable agriculture, agricultural equipment, various microgrid technology for people living in rural communities and villages […] and a host of products,” Cameron explained. He added that because of that investment, USCGF is now specifically looking at potential western investments in sustainable agriculture that can be marketed and sold through those channels.
Currently, the firm is planning on raising a U.S.-dollar fund in the future, but is not currently focused on that effort. Instead, USCGF plans to invest out of its RMB fund. It has already invested in one western company out of the fund–U.K.-based Coolterra, which has developed water-based cooling systems for computer data centers.
“We’re smart enough to know how hard it is to raise a new fund, and we’re having such great traction with our RMB fund,” Cameron explained. “We decided that it would just help us to have more of a track record and do a few western investments to prove out the model out of the RMB fund.”
Once the firm has invested in more companies outside of China, it plans to source anchor investments for a U.S.-dollar fund in Asia and then to speak to investors in the U.S. However, that will not be without its challenges.
“In the U.S. venture community green or cleantech investments equal money-losing investments,” Bai said. “That’s very unfortunate.” Much of that worry comes from the failure of the first cleantech wave, in which investors made strong bets on R&D-intensive investments that didn’t pan out.
To that end, the firm is hoping that its providing access to China for commercially and technologically-viable cleantech companies will prove its hypothesis and change the perception of cleantech investments as a whole in the west.
Bai also hopes that the fund will help foster connections between China and the U.S. in the future, specifically as tensions worsen between the two countries on the international stage.
“There are certain frictions between the two countries right now,” Bai said. “But I personally believe, and my partner’s and our LPs certainly believe, that by combining the U.S. green technology and China’s free markets, we can help the U.S. and China to work more closely on global warming.”
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