Investment guru Don DeWaay calls the current investment market in ethanol and soy biodiesel plants “an overnight success that took 25 years to happen.”

Though he believes the biofuels industry has a great future, DeWaay said the sky-high returns seen by early investors, primarily farmers, are not sustainable as the industry matures.

“It’s not rural legend that people have walked away with five to 10 times their money and substantial cash flows on top of that,” said DeWaay, whose firm, DeWaay Capital Management, has analyzed dozens of potential deals for its high-wealth clients. “Is that going to continue? I think not.”

Once ranked 50th in the nation for private equity investments, Iowa now ranks 10th, in large part due to the capital that biofuels plants are attracting, said Tina Hoffman, deputy director of the Iowa Department of Economic Development.

As the nascent biofuels industry continues to build capacity with new plants, some investment groups are forming in an effort to maintain ownership control and encourage further investment within Iowa. And yes, they want to make money at it, too.

BIOWA Development Association, an Iowa City-based trade association made up of 72 biofuels-related companies, is preparing to launch Biowa Capital, a venture capital and private equity fund that will focus on investments in biofuels production facilities, technologies and companies supporting the industry.

“There’s tremendous interest in doing this (to have our own funds under management),” said Mike Ott, BIOWA’s executive director. “It’s the next stage.”

Ott said BIOWA is still in talks with several key potential investors regarding the fund, which would be open to any accredited investor – typically someone with a net worth of at least $1 million.

“We have many investors, from as small as $25,000 to those who will invest up to $5 million,” he said. “We’re looking to do as much investing of Iowans’ money as possible, but also are looking to bring money from outside the state. The intent is to make money, and keep as much of it as we can in the state. These are very profitable operations, and Iowans have smartly invested in them until now. Now we’re seeing interest from Wall Street. It’s fantastic to have that much interest in the state.”

In addition to BIOWA’s efforts, venture capitalist John Pappajohn is reportedly assembling an $800 million fund that will seek majority ownership positions in up to 10 farmer-owned ethanol plants in the Midwest. At the same time, one local investment banker said his firm has begun to bring in its New York counterparts for Midwest deals that have reached the $250 million level.

Regional and local venture capital funds are also potential investors. For the North Iowa Venture Capital Fund LLC, its investment in the Freedom Fuels plant in Mason City served a twofold purpose.

“It was a good investment opportunity and a local economic development project,” said Tim Putnam, associate director of the John Pappajohn Business & Entrepreneurial Center at North Iowa Community College. “I would say that for venture capital funds that are looking to diversify, biofuels plants are definitely a strategic alternative to look at.”

With the significant profit potential that ethanol and biodiesel represent, DeWaay said he hopes that the investments can remain as local as possible.

“If this is all we think it is and this is going to be highly profitable, I surely don’t want those profits to go rushing out to New York,” he said.

At the same time, potential investors should be very selective when reviewing projects, and be extremely cautious about investing in private-placement offerings, he said.

“All plants are not created equal,” DeWaay said. “Some have done very well, and some have not done anything. I think there will be varying degrees of success in raising capital for these projects.”