CleanTech investing has set another record-breaking investment quarter globally, with smart grid, thin film and algae biofuels technologies enjoying all-time highs in financing.

Third Quarter 2008 statistics, published by the Cleantech Group, show that the third quarter 2008 brought in $2.6 billion across 158 companies in North America, Europe, India and China.  This brings year-to-date investment to $6.6 billion-surpassing investment in the sector for all of 2007 with three months to go. Canada’s cleantech sector pulled in $49 million, less than 2% of the grand total.

The sector is on track to reach $7.5 billion to $8 billion by year’s end - a potential 25 percent increase over 2007, said Brian Fan, senior director of research for the Cleantech Group. The quarter totals represent a 37 percent increase over the same period a year ago.

"This quarter will probably be the high point for investment for at least several quarters," Fan said. "Soon you’re going to see a pullback. Companies will have trouble closing big rounds of equity."

The previous record was set in the second quarter of 2008, when the sector garnered $2.2 billion. The Cleantech Group has been tracking the sector since 1999 and provides research, financial services and networking events around the world.

The good third quarter news might have to keep the sector warm in what’s being projected as a chilly winter for project finance and initial public offerings.

The dual blow of a stagnant U.S. economy and Wall Street turmoil is expected to shrink the size of funding rounds and valuations, especially in the thin-film sector, Fan said. Cleantech companies in need of cash will likely turn to the more-expensive option of bridge financing, rather than traditional loans or equity financing.

The number of financing deals is also likely to slow because there could be fewer people working at investment banks, which traditionally organize the deals, Trevor Loy, managing partner of New Mexico-based private equity firm Flywheel Ventures, told the Cleantech Group.

"But beyond a quarter or two, I think it’s the best thing you can see for cleantech because I would expect to see boutique investment banks be formed who really focus only on our sector," said Loy, also a board member of the National Venture Capital Association. "Once the cleantech banks get going, I think they could accelerate the access to capital for cleantech companies."

One of the quarter’s standouts was smart grid technology, which raised $202 million. The sector averaged less than $30 million a quarter for the past 10 quarters.

Fan said part of the increase is because utilities are preparing for plug-in electric cars, such as the Chevy Volt, which is scheduled to be available to consumers in 2010. Loy said the exceptional interest in smart grids showed the cleantech sector is maturing.

"People are realizing that cleantech and renewable energy are not only about solar power, biofuels and wind generation, but that there’s an entire grid that includes challenges with transmission and storage," he said.

Among the other important deals this quarter, thin-film startups raised $620 million, with the majority going to CIGS startups such as SoloPower ($200 million), OptiSolar ($78 million) and Miasole ($35 million). Other big thin-film deals boosted cadmium-telluride or copper-indium-sulfide technologies.  AVA Solar joined the thin-film funding pool with $104M.

Algae investments hit $95 million, with more than $50 million to Sapphire Energy and $45 million to Solazyme. The quarter was an all-time record, surpassing the previous high of $84 million in the second quarter of 2008.

The record-breaking quarters for thin film and algae were in part driven by a race between companies, Fan said. Once one startup raised enough capital to begin scaling the technology, the rest had to raise similar amount to stay in the game, he said.

"Three or four of the thin-film startups are likely to survive," Fan said. "All of them, and their investors, want to maximize the probability of that company cracking the manufacturing code and coming out one of the winners."

Only four cleantech companies raised money through IPOs in the third quarter for a total of $587.1 million, with $500 million of that going to GT Solar International through its Nasdaq listing (Nasdaq: SOLR). The previous quarter saw six IPOs worth $4.4 billion.

But there were a record 138 merger-and-acquisition transactions in cleantech during the quarter, including International Power’s $2.5 billion acquisition of Trinergy and Iberdrola’s estimated $4.6 billion acquisition of Energy East.

Loy said the continued aversion to fund-raising through IPOs hurts the long-term prospects for cleantech because potential investment dollars are tied up elsewhere.

Brady Berg, a partner in the cleantech and renewable energy group of law firm Mintz Levin in Palo Alto, Calif., noted that a number of significant cleantech-focused venture funds have already closed in recent months.

"Despite the current financial crisis, we are cautiously bullish on venture investment in the cleantech sector in the fourth quarter," he said. "There is a lot of venture capital and private equity money to invest in the sector."

The five most active venture firms in cleantech in the quarter were RockPort Capital Partners, Google, Advanced Technology Ventures, Kleiner Perkins Caufield & Byers, and Khosla Ventures, according to the report.

U.S. companies received $1.75 billion in the quarter, accounting for 67 percent of the total, with $1.1 billion going to California-based firms.

Canada’s cleantech sector pulled in $49 million (less than 2%), while European and Israeli companies pulled in $742 million, or 28 percent of the global total.

Chinese companies raised $111 million, for 4 percent of investments, with more than half going to solar. Two Indian companies raised $6.3 million total, for 0.2 percent of the global tally.

In general, despite the meltdown in international financial markets, all signs suggest the cleantech investment momentum will stay relatively strong, though some analysts caution the bloodletting on Wall Street is far from over.

For More Information: Cleantech Group