Features, October 2000 Merrill Lynch sees green The US investment bank is on the road and looking to raise up to £200 million for a renewables and alternative energy fund. Mark Nicholls reports Robin Batchelor talks with the fervour of the convert - and well he might. The analyst and fund manager is currently on the road, presenting investors with a novel product: a new fund from Merrill Lynch Investment Managers (MLIM), that will invest exclusively in renewables, alternative energy and energy technology companies. The novelty lies in the logo on the prospectus. For MLIM, the asset management subsidiary of the leading US investment bank, to be throwing its weight behind such a fund represents a breakthrough for this burgeoning sector. But as the presentation continues, it becomes clear that Batchelor's conversion is partial. Merrill Lynch not known for deviating from its raison d'etre - that of making money for its clients and shareholders. And the new fund is no exception: it is not aimed at investors concerned solely with saving the planet, Batchelor stresses, but at those concerned with making high returns from a sector poised for dramatic growth. "The investment case is about growth - the idea is to invest for a real return. But investors can have a good conscience about it at the same time," he says. The fund, called Merrill Lynch New Energy Technology, will invest in companies in four areas: renewable energy; automotive and on-site generation (fuel cells and micro turbines); energy storage; and enabling energy technologies (including green power marketing, niche materials, and companies involved in emissions trading). It will seek pure play investments, avoiding larger energy companies such as Royal Dutch/Shell that have alternative energy subsidiaries. Growth in the sector has been impressive. Over the last 12 months, Vestas Wind Systems, a Danish wind turbine manufacturer, has seen its stock rise 380%, while US firm Fuel Cell Energy has posted 980% gains. Analysts and corporate finance teams are increasing their coverage of the sector, and moving beyond the big names. Marcus Storr is an analyst with Dresdner Kleinwort Benson in London, and has been concentrating on bigger firms with significant alternative energy interests, such as German electronics giant Siemens and Swedish-Swiss engineering firm ABB. But his focus is widening "We're digging deeper into this sector - it's a very attractive market, and it's just taking off." "We're seeing increasing interest from institutional investors," agrees Glen Liddy, a director at Schroders Salomon Smith Barney (SSSB), also based in London. "These companies offer growth in the engineering world, and that's hard to come by." As an emerging sector, environmental technology and alternative energy companies don't sit easily with traditional sector definitions. While SSSB looks at these firms from an engineering perspective, within MLIM it is the natural resources team that is tackling the sector - Batchelor manages the firm's Energy International Fund. But analysts agree on the underlying drivers for growth. "Investors perception of the energy industry - growth in line with GDP growth, cyclical performance, boring - doesn't apply here," says Batchelor. He identifies environmental pressures (whether from international efforts to cut greenhouse gases, or from green consumers), the deregulation of energy markets, technology advances, and growing demand for highly reliable, often locally-generated, electricity as growth signals for the fund's target stocks. The fund has a global mandate, and will focus on companies with a market capitalisation of between £200 million to £2 billion. However, it can place up to 25% of its assets in unlisted companies. Veterans of the sector have welcomed the new fund. Bruce Jenkyn-Jones is a fund manager at Impax Capital, a UK boutique investment bank which specialises in environmental infrastructure and technology. He manages the %35 million Almbrand Invest Environmental Technology Fund, a joint venture between Impax and Danish bank Almbrand. The fund is up 125% year-to-date. "We're very positive about the new [Merrill Lynch] fund. It demonstrates that the sector is becoming a mainstream investment opportunity," says Jenkyn-Jones. Some analysts, however, are concerned about the effect that the MLIM fund and future, large-scale investment flows could have on valuations in this still-immature sector. There is some danger of a bubble developing, as too much capital chases too few companies, but this depends on how broadly MLIM - and subsequent investors - define their investible universe. Batchelor is confident that the 300 companies he has identified can between them absorb £200 million. If anything, the sector is suffering from too little capital. "The concern is more that companies have sufficient capital to exploit market opportunities," says Graham Birch, head of the natural resources team at MLIM. Ninety of the 300 companies have stock market listings, and interest in the sector is encouraging more to come to market. There have been five IPOs (initial public offerings) in MLIM's investible universe since January, with at least 10 more expected within the next 12 months. MLIM has capped the amount of money it is looking to raise at £200 million, although Batchelor says the firm would be happy with anything above £50 million, and has set a minimum of £35 million. The fund closes on 17 October. Batchelor is upbeat about investor interest so far. He says he is getting a favourable response from energy, technology, and socially responsible investors, and that money is already flowing into the product - despite the fact that investors are not obliged to hand over any money until the end of September. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE