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Investors Like Clean Tech, But Find Few Deals in India

We had discussed earlier this year that  most of the fund-raising in Renewable Energy and Cleantech in India is happening in mega project developments and developers.

Renewable Energy is at an interesting stage in India where the question is now on how best we can tap the potential and convert the opportunity available into actual projects being developed and scaled on the ground.

Investors have also shown a lot of interest in this sector and according to data from Venture Intelligence, $1.5 billion has been invested by venture capital and private equity firms into clean energy  developers from 2008 to date. Indian Cleantech sector  has witnessed an investment of about $465 million from 2008.

However, deals have been hard to come by and most of the funds are crowding around the same kind of available deals that are far and few between.

Some of the more ambitious funds, have gone ahead and bootstrapped clean energy development companies by starting off with a mega asset acquisition. Howeverm often with a senior management that lacks renewable energy and power sector experience and only a manufacturing or similar experience, the capacity addition and scale over the last few years has left a lot to be desired. The inability of the private equity fund to provide any kind of domain expertise has not help the cause either.

According to reports today, earlier this year, Reliance Venture Asset Management Pvt. Ltd. co-invested $12 million in biomass power-focused All Green Energy India Pvt. Ltd., ending the investment firm’s three-and-a-half-year search for an “investable” clean-tech firm.

Reliance Venture and other investors in India find backing of clean-technology or renewable-energy companies a dogged quest as the dearth of sound opportunities makes good deals few and far between. Companies in this cluster are not scaling up or maturing fast enough to absorb large amounts of capital and offer returns, venture capital and private equity investors say.

But one issue that investors keep coming back to is the fact that there are only a few quality firms in this space, said Harshal J. Shah, chief executive of the venture capital arm of the Anil Ambani-led Reliance Group, adding he wouldn’t be surprised if it takes Reliance Venture at least another year to find a similar deal.

“Two-three years back, the clean-tech sector saw a mad rush of investments and a lot of money went into what really were not good deals,” Mr. Shah said. “These deals were also priced exorbitantly. Today, many such companies are losing capital, leading to a glut in the market.”

We belive that Mr. Shah’s summary above is spot on and we still see the same attitude among some of the investors who would like to have a “clean energy investment” . Panchabuta has often interacted with funds seem to get excited by developers with a 5MW biomass and with a 75-100MW pipeline over the next three years. Another theme that seems to have caught the fascination of some of these investors is that of “municipal solid waste” and “waste to energy” themes. A number of  investments will be made in such projects over the next year as we see it.

Things could change for the better with some recent regulatory changes that may trigger small- to medium-sized deals. However, larger deals may remain sporadic as there are few large projects, said Gokul Chaudhri, partner, BMR Advisors.

“Favourable regulatory regime (similar to Europe and the U.S.) in terms of feed in tariffs, direct and indirect tax incentives/holidays coupled with naturally available resources have led interest in the sector,” he said.

Furthermore, last year, the Central Electricity Regulatory Commission introduced a renewable energy certificate to promote green energy. The certificate is issued to renewable power generators for each megawatt of electricity generated that can be sold in the market. Power distribution companies that can’t meet their renewable energy targets can buy these certificates.

Good observations by Gokul Chaudhri, partner, BMR Advisors and we tend to agree with him. REC is going to be the biggest game changer though price discovery mechanism including floor and forbearance prices need to be market discovered. A few of the leading IPP’s are already working out very interesting models with obligated entities to facilitate medium to long term off market mechanisms both on the non solar and more on the solar side. We should expect to see a few of these transactions made public in the next year.

In renewable energy and water treatment, there are only four to five companies that can be considered for investment, said Karthik Ranganathan, partner, Baring Private Equity Partners India. “The number of companies is limited.”

Given their investments in entities that have developed biomass projects, Karthik Ranganathan, partner, Baring Private Equity Partners India seems to have made the right observations.

“It’s a high-risk area and it has not been a raving success,” said Ravi Adusumalli, head of private equity firm SAIF Partners India. “A tremendous amount of capital has been invested in such firms in the U.S., but returns have not been stellar.”

Though Mr. Ravi’s observations about the area is spot on, the comparison of the sector with that in the US does not seem as logical given the fact that  constraints, drivers and opportunities in both these countries for renewable energy are very different. It is this kind of approach and generalizations by private equity funds that has led to a lot of investments during  a mad rush as Mr. Shah has said.

“Clean Energy has witnessed steady investments into IPP’s and 2010 was a record year with half a billion dollars invested. The appetite for investments into Clean Energy is still high, but companies have not been able to scale as much as there is capital available. Clean Energy still continues to be among the top three areas of interest for investments when we spoke to a number of funds and their limited partners,”said Arun Natarajan, CEO of Venture Intelligence, talking to Panchbuta .

We believe that over the next few years, a lot of funds without sectoral expertise that have ventured into this space and made a few renewable investments will face severe challenges.

Those that succeed will either be dedicated cleantech or clean energy funds or those with a team that has the domain expertise as relevent to the Indian context.

We are excited to be covering this space at this nascent stage and with our work in this area with all the concerned stakeholders in the ecosystem.

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