(Bloomberg) -- Among the many pressing problems the UK’s new government needs to address is how to increase financing to companies developing the critical technologies needed for the low-carbon transition.That’s according to Barclays Plc, which on Wednesday published its recommendations for how Kier Starmer’s team can address a crippling “funding challenge” that’s “hindering the ability of growth-stage climate-tech firms to scale at pace.” Find a solution, and Britain can “leapfrog international markets and become a destination of choice for innovative climate technologies,” the London-based bank said in a statement.“The UK is renowned for its innovation, but there is a missing middle of capital holding back successfully scaling viable realeconomy ideas that can support the transition to net zero,” Daniel Hanna, Barclays’ global head of sustainable finance, said in the statement.Barclays is one of a number of voices, including JPMorgan Chase & Co. and KKR & Co., to point out a structural flaw in capital markets where companies working on everything from battery storage to green hydrogen are starved of funding. Often too asset-heavy and requiring too much money for venture capitalists, and at the same time too nascent and unproven to attract infrastructure investors, many climate tech companies find themselves in a no-man’s land, otherwise known as “the missing middle.”The crunch point in the UK is for companies in the “growth” stage, Barclays said. While growth-stage investors are used to funding software startups, climate-tech companies often have high initial upfront costs, high capital-expenditure requirements and longer timeframes for becoming profitable, all of which “creates barriers to securing traditional investment,” the bank said.Funding for Series B and above climate companies fell 48% year-on-year in the first half of 2023 and a £1.5 billion ($1.9 billion) climate-tech financing gap has emerged for companies of this size, Barclays said.“Growth equity investors want quick returns,” said Christophe Williams, chief executive officer of Naked Energy, a British solar-heat company. “Fund managers want three-year exits to move on to the next deal, but the hardware businesses that are needed for the build-out of clean energy infrastructure need more patient capital to get to the inflection point for real growth.”
Even so, Williams’ company raised £17 million of new equity this month as part of a Series B first close led by E.ON Energy Infrastructure Solutions, with additional investment from Barclays.
Barclays has zoned in on the “£10 million to £25 million gap,” and called for the British Business Bank or the UK Infrastructure Bank to launch a specific fund focused on climate-tech transactions requiring debt or equity investment in this price range.
The bank also called for those two institutions, which will both have a role in Labour’s new National Wealth Fund, to “expand financing mechanisms and maximize existing tools and mandates,” such as creating guarantees to support climate-tech companies and foster an improvement in collaboration between public-finance groups.
Andrew Cunningham, CEO of UK green-hydrogen company GeoPura, which is a Barclays client, said another key impediment for growth to companies in the so-called missing middle is gaining access to debt financing. Because many of these companies don’t have established histories of generating repeatable cash flow or consistent earnings, they’re typically excluded from asset-backed financing, he said.
Filling in the missing middle will be essential if the trillions of dollars required for the energy transition are to be effectively deployed. And the climate-tech companies that need the funding “will play a pivotal role in directly reducing or removing greenhouse gas emissions and improving resilience or adaptation to the physical impact of climate change,” Barclays said.
“It's not about lots of new money; it's about how we put that money together,” Barclays' Hanna said in an interview on Bloomberg Radio on Wednesday.
(Adds comment from Barclays’ Hanna in final paragraph.)
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