ArcTern Ventures has amassed US$335-million for its third climate-focused fund from a roster of big-name institutions in a fundraising round the venture capital group says shows strong interest in cleantech opportunities despite pressures in the sector.
Toronto-based ArcTern, which concentrates on climate technology companies around the world in the early commercial stages, said it is seeking out opportunities in North America and Europe for its Fund III. It is scouting for companies that have the highest potential to slash emissions in fields such as renewable energy, low-carbon mobility, circular economy, sustainable food and industrial decarbonization.
The new fund has already made investments in eight companies in Europe and the United States, said Murray McCaig, co-founder and managing partner at ArcTern, whose latest fundraising proceeds make it one of the largest players in that segment of climate venture capital globally.
Unlike many Canadian-based venture capital firms, ArcTern invests outside its borders and its new fund isn’t financed by funds-of-funds that have been seeded by capital from the Canadian government through a sector assistance program.
Early-stage cleantech had a rough run in 2023 along with other technology sectors as high interest rates and surging supply costs pushed investors to industries offering more immediate and stable cash flows. Fundraising was difficult because both venture capital firms and their investors were “frozen, not wanting to move,” Mr. McCaig said. Many venture funds in other speculative sectors including early-stage software companies have similarly struggled to raise money.
The past year in cleantech was certainly a mixed bag, with the Inflation Reduction Act in the United States attracting billions of dollars in investments in environmentally focused projects, and some big deals, such as the US$1.1-billion sale of Squamish, B.C.-based Carbon Engineering to Occidental Petroleum Corp. But many investments sagged. As a proxy, the iShares Global Clean Energy exchange-traded fund has lost more than a third of its value in the past 12 months.
The initial plan was to raise up to US$400-million for Fund III, and by last March, ArcTern had raised about US$300-million. Despite falling short of its goal, Mr. McCaig said he’s pleased with the total, which is roughly twice as large as its second fund, a $200-million capital pool it accumulated in 2018. ArcTern’s first fund in 2012 raised $30-million.
Now, the chill enveloping the sector appears to be lifting, Mr. McCaig said.
“The last year was a brutal year for everyone across the board,” he said. “Now there’s a lot of dry powder sitting on the sidelines in the climate tech world, and we think in the latter half of the year it’s really going to start moving, and now in the next six months is a great time to be investing in the sector.”
A number of large pension funds and investment managers would seem to agree with Mr. McCaig’s assessment. Some of the investors in Fund III include TD Bank Group TD-T, OPTrust, CPP Investments, Church Pension Fund and Credit Suisse. The latter two are first-time investors with ArcTern, which has investing partners in Montreal, San Francisco and Oslo.
The fund is targeting first-time investments in startups in the US$5-million to $10-million range. With further contributions, investments will tend to top out at about US$35-million, he said. It will participate in series A and B funding rounds.
ArcTern has yet to invest in Canadian companies through its latest fund, though it is looking, Mr. McCaig said. One of its most prominent investments in Canada from earlier funds is Sheertex, a Montreal maker of rip-free fabrics used to make pantyhose and swimwear.
The fund also has investments in Toronto-based Hydrostor Inc., which is pursuing energy storage projects in North America and Australia; U.S. electric-vehicle maker Harbinger; Vancouver’s Clir Renewables, which improves electricity output from wind and solar farms; and several others.
Jeffrey Jones
Sean Silcoff