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Michael Butler is Chairman and CEO of Cascadia Capital, an investment bank with considerable experience in the cleantech sector. He hosts regular dinners for the cleantech community in the Pacific Northwest. At a recent event, the conversation turned to the explosion in M&A activity in energy efficiency and smart buildings. Since he knows where the money is flowing, I asked Michael to give SGN readers a peek into his crystal ball. -- Jesse Berst

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By Michael Butler

In Q2 2011, equity financing and M&A in the energy efficiency / demand response sector were healthy, although down from the previous quarter. Q1 had been a strong "bounce-back" quarter as deals expected to close in Q4 2010 slipped into Q1 2011. In Q2, money rotated into the sector. It left capital-intensive sectors such as biomaterials/biofuels and solar and moved into the more capital-efficient energy efficiency sector. Indeed, energy efficiency was the top sector in cleantech for Q2 2011 with the largest amount of investment dollars ($428 million) and the largest number of deals (38).

As robust as the efficiency sector is already from an investment standpoint, we believe it will explode in Q3 and Q4.

Throwing down the real-time gauntlet

The Schneider Electric purchase of Summit Energy Services for $268 million was priced at approximately 4X revenue. Summit Energy offers a real-time, software-based energy management solution that saves energy. In addition to software margins, Summit also has a subscription-based business model, making it very attractive from a margin and visibility standpoint. Wall Street likes the Summit business model and puts a premium valuation on it.

In our opinion, the transaction signaled that the energy efficiency sector has come of age. It put pressure on other large corporations in the energy services sector to respond strategically. On the one hand, technology companies are having a hard time accessing the large corporate clients that are the buyers of their products. On the other hand, the large energy services companies have client access, but those clients want real-time energy management. Rather than build such products, we expect the large energy services companies to gain the product capability through acquisition.

Cascadia is currently representing a large energy services corporation on a buy-side engagement.  We have spoken to approximately 60 potential acquisitions. More than 50 of them had already been contacted by other potential buyers! We conclude the real-time demand management sector will see massive consolidation.