September 14, 2012

Cleaning Up on China’s Waste

Technology that minimizes or even reverses environmental damage — known as “clean tech” — is hot. Now it’s catching on in China. We talk with the first venture capitalist to focus on this explosive sector.

Rebecca McReynolds

Technology that minimizes or even reverses environmental damage — known as ”clean tech“ — is hot. Now it’s gaining favor in China.

One of the major players making that happen is Don Ye, head of Tsing Capital, the first clean-tech venture capital fund in China. (Ye was a speaker at the recent China Business Initiative Forum, sponsored by the Chazen Institute.) Ye searches out Chinese start-ups that are working to conserve the world’s natural resources — everything from producing renewable energy and cleaning up water and air pollution to managing China’s waste and finding cleaner ways to use fossil fuels. Today, the company has more than US$650 million in assets under management.

“We are looking for technology that focuses on fundamental environmental issues: sludge treatment, kitchen waste treatment,” he said. “Our companies may not be using fancy technology, but they are addressing fundamental environmental issues using pragmatic technology.”

For example, one of Tsing Capital’s early investments was Beijing Goldenway Bio-Tech, which converts organic waste into organic fertilizer. The technology isn’t new, but implementing it is still considered cutting-edge in many parts of China. Using Tsing’s cash infusion as working capital, the company has expanded from 1 city to 12.

When choosing investments, Ye starts with the standard VC metrics: earnings potential, market size, management team. Then he borrows heavily from the socially responsible investment guidelines set by the International Finance Corp., a division of The World Bank that was an early investor in Tsing Capital. In 2001, when he started Tsing, socially responsible investing was already a $2.1 trillion industry in the United States, but it was brand new in China. “There was no comparison in China, so it was very difficult to convince limited partners,” he says.

Finally, he looks for support from local and national laws and regulations. “Without government regulations, no one will treat waste voluntarily,” he says. Those types of regulations were few and far between in 2001. By 2007, though, China’s central government was starting to pay more attention to conservation issues, adding new environmental and energy consumption mandates to its Five Year Plans. The 12th Five Year Plan, which began in 2011, added new focus on green investments and included an aggressive list of new energy efficiency mandates and other environmental targets.

Since 2007, more than $2.5 billion in venture capital has poured into China’s clean-tech industry, according to one estimate, although the total size of the market is likely much larger, since many VC deals aren’t reported in China. Tsing’s most recent offering, CEF IV, has a target of $350 million and a Who’s Who list of international investors, including Électricité de France S.A, BASF, and BP p.l.c.

“Our belief and our vision has been proven in the last twelve years,” Ye says. “Future investment is going to fall more into this area because it covers the basic needs of all human beings.”

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