According to this report, while many investors in India are keen on backing clean-tech companies, the sector attracts either large deals or early stage investments.
PE investors still find it hard to get clean-tech deals
Last week, Reliance Venture Asset Management Pvt. Ltd co-invested $12 million (Rs54.72 crore) in biomass power-focused AllGreen Energy India Pvt. Ltd, ending a three-and-a-half-year search for an “investable” clean-tech firm.
There are only a few quality companies in this space, said Harshal J. Shah, chief executive of Reliance Venture, the venture capital (VC) arm of the Reliance Group, formerly known as the Reliance-Anil Dhirubhai Ambani Group (R-Adag).
By implementation play, Shah refers to technologies or models companies adopt from others and implement locally, such as hydropower generation that need large capital. Clean-tech innovation is about companies designing a new technology to generate power in a cost-effective manner with minimum emissions.
While many investors in India are keen on backing clean-tech companies, the sector attracts either large deals or early stage investments.
In 2010, $790 million was invested across 18 clean-tech deals, of which the top three alone were worth $595 million, according to data from VCC-Edge, which tracks investment activity. The others were small deals of $10,000 to $7 million.
There are hardly any mid-size deals of $10-25 million in the space—the ticket size of preference for PE firms in India, say investors.
Raja Kumar, founder and chief executive of Bangalore-based Ascent Capital Advisors, a PE firm, said existing opportunities in clean technology are either in big-ticket deals, with companies deploying capital mostly in mega projects, or in early stage deals, where companies raise capital to build technology platforms.
“There is definitely a dearth of clean-tech companies that are of decent size to be able to attract growth capital. Historically, clean-tech companies have relied on government incentives to be viable and that is still the case in India,” he said. “These companies will take some time, maybe two-three years, to scale to a stage where they can attract growth capital.”
The crucial question in this sector is: Are there innovations that can consume large investments and give big returns to investors, said Vineet Rai, chief executive of early stage investment fund Aavishkaar Venture Management Services.
“We are closely looking at this space but have not seen many companies offering sustainable and scalable products. Right now, the only thing we know (is) there is a gap in demand and supply. Large capital needs to be pumped in before returns can be seen,” he said.
Investors say they are waiting for the clean-tech sector to prove itself with a show of scalability and returns before they take the plunge.
The model is not proven yet, said Sohil Chand, managing director, Norwest Venture Partners India. “In IT (information technology), you can invest $5 million and can still build a company. It (clean tech) requires investment of thousands of dollars and you still don’t know if it will work. It’s a huge risk.”
AllGreen, founded in 2008, did its own bit of raising debt and getting regulatory approvals before stepping into the market to raise funds.
“The basic things that need to be put into place include project debt; otherwise it is difficult to go ahead with renewable energy projects,” said Kamlesh Tejwani, chairman and chief executive, AllGreen.
Traditionally, debt comprises 60-70% of the overall cost of any project.
As the sector grows, investors predict selective investments in clean tech in the near future. Investments in the sector could pick up over the next couple of years, said Kumar, as more clean-tech companies grow to an attractive size and as the regulatory framework gets crystallized.
As rightly said, most of the fund-raising in India in this sector is happening either in early stage companies or in mega project developments.
The biggest investments are in the renewable energy project development companies and projects itself. There again, there are two different trends that are emerging. One is the funding of green power developers like Orient Green Power Limited, AuroMira Energy etc. There are also domain specific IPP’s emerging like Azure Power in Solar, Wind farm IPP developers like Caparo Energy etc.
There are also development teams and companies being organized with PE funding where the team starts off with acquisition of disparate generating assets in either the small hydro or biomass space given the huge lead times and then working on aggregation of projects in various development stages and subsequently expanding on the same through brown field developments and/or new projects in the same space. All these are capital-intensive projects that are garnering huge PE investments.
It is pertinent to note here that, a lot of big projects in the renewable space is also being carried out by large publicly listed power developers like Tata Power, Reliance Power and Lanco Infrastructure among others.
In the cleantech space, Panchabuta is aware of a number of rapidly growing consulting and services companies in the fields of renewable energy project development consultancy, carbon advisory, energy efficient and monitoring solutions providers and most recently renewable energy certificate consulting and some form of carbon life cycle management companies.
These companies are all service/consulting oriented and hence do not require huge capital except for capacity building and business development. This could be the area that VC’s are talking about in the small investment space and number of them have expressed interest to Panchabuta in investing in the same.
There are a few companies in the offgrid application and solutions/ products space (bio and solar), biofuel companies, smart grid and energy efficiency space, power distribution monitoring, custom-made electric vehicle design/manufacturing companies etc that are ready for growth capital, but such companies will definitely command attractive valuations and deals are expected to happen in the next 12-18 months.
As Panchabuta has earlier noted, a DESC India -CII released report, that studied the various sectors in India and the potential of ICT in each of them to Cut Carbon Footprint, Commercial Buildings had the maximum saving potential of 42%.
Panchabuta, would love to meet and discuss this with the various stake holders in the ecosystem that might be present in the Venture Intelligence 2011- Apex Summit which is probably the largest and first of its kind event being organized with a special focus on Cleantech and Renewable Energy Industry and Finance in India.