As the economy heads for another downturn during the second half of 2011, businesses and investors will increasingly shift their focus toward cost-effective energy solutions and proven sustainable technologies, according to the latest report from Cascadia Capital.

Michael Butler and Jamie Boyd, the leaders of Cascadia Capitals Sustainable Industries practice, expect to see the energy efficiency sector spur a flurry of M&A activity as budget conscious businesses seek to further cut their energy use and costs, and for investment in environmentally friendly natural gas drilling practices to spike as the practice of "fracking" increasingly comes under fire.

In addition to the predictions below, Cascadias latest report provides insight into the drop in investment activity during Q2, and makes the case for why the sustainable sector will ride out this new economic downturn.

1.) Resurgence of M&A activity driven by the energy efficiency sector

Energy efficiency-based M&A will drive a flurry of M&A activity in H2 2011. Large managed energy service providers are facing increasing demand from their customers for real-time energy management, and they are actively looking to buy the technology that they can deliver quickly to their large client base.

2.) Solar continues to dominate the renewable energy mosaic

At Cascadia, we believe that both utility scale and distributed generation solar power will see continued growth and investment activity through the second half of 2011. Driven by geographic location and local- and state-level incentives, solar installations continue to grow, and in turn drive investment in the space.

3.) Renewed investment in sustainable natural gas drilling practices

New environmental concerns over the side effects of natural gas "fracking" will also drive investment activity toward sustainable, environmentally friendly initiatives.

4.) Declining energy prices across all sectors as the economy returns to a downward cycle

Despite strong growth potential, Cascadia expects energy prices to decline in the second half of 2011 as the economy slows. We believe that oil will remain around $100/barrel or lower, and electricity usage will show a quarter over quarter decrease from Q2 to Q4.

There were 86 M&A transactions in Q2 2011, of which 31 deals were disclosed for a total of $13 billion. This deal total was down compared to 140 transactions totaling $15.2 billion in Q1 2011.

While this quarters figures may on the surface represent a slowing of momentum in the M&A markets, we think the downward adjustment was more a function of the robustness of the Q12011 activity and that the Q2 2011 numbers indicate more of a steady state environment.
source: APEC-VC Korea