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Private Equity investments in cleantech projects in India on the rise

According to reports, with Government policies and incentives in place for renewable energy, the number of private equity investments in the clean technologies sector is increasing.

According to data from Venture Intelligence, a research service focused on private equity and merger and acquisitions , there were five deals in the clean technologies space in January-March 2011quarter; ten in the April-June 2011 quarter and 14 deals in the July-September 2011 quarter.

The amount invested in the July-September quarter was $359 million compared with $176 million in the immediate previous quarter.

Recently, Suryachakra Power Corporation entered into a joint venture with American Bio Sources Inc (ABS) and Environmental Energy Finance Corporation Inc. USA (EEFC). The investment will go into developing renewable energy power projects of 500 MW in India. Suryachakra Power Corporation entered the wind energy sector earlier this year.

The above investment deal follows a series of investments into the clean technologies space. Goldman Sachs invested $204 million in start-up renewable energy firm, ReNew Wind Power in September, according to Venture Intelligence. This was one of the biggest private equity deals in the clean technologies space in India. Prior to this, FE Clean Energy invested $40 million in NSL Renewable Power in July. IDFC Project Equity invested $112 million in Caparo Energy India in June. Baring India invested $90 million in Cethar Vessels in December 2010.

“Investing in the clean technologies space requires a great degree of specialisation. These investments have a long gestation period and a different returns profile,” said Mr Rahul Khanna, Managing Director, Canaan India. The firm has not invested in this space so far.

Although the clean technologies space is still nascent, investors say that the sector looks attractive and could see a lot of growth.

“A lot of firms are investing in wind energy projects. It is difficult to get investment for solar projects as subsidies are uncertain,” said Mr Avinash Gupta, Leader, Financial Advisory, Deloitte in India.

There are a lot of things that investors must keep in mind while investing in a renewable energy project. “To ensure that the investment is not very risky there are a couple of things that investors should keep in mind. They should invest in a company which is backed with the right business model and investments should be with the right entrepreneurs. Another important aspect is that a portfolio approach or diversified investment approach should be adopted,” said Mr Raja Parthasarathy, Partner, IDFC Private Equity.

Exits in the clean technology sector are difficult; investors usually exit after 4–6 years, say private equity investors.

There has been a trend towards investing in a ‘platform manner’ in this sector. Called ‘platform stories’ in investor jargon, these are private equity investments in a staggered manner.

In the platform model, private equity investors commit large capital to a company to set up a particular project. Money is released by the investor to the company on achievement of pre-decided milestones. A particular amount is given to the company when it sets up its first 90 Watt project

“We have noticed an increasing number of private equity players commit large capital to a company engaged in renewable energy business. It is a time bound activity where parts of the money are provided by the investor as and when the first part of the goal is accomplished,” said Mr Gupta of Deloitte.

IDFC Private Equity has invested nearly Rs 440 crore in Green Infra Ltd, a renewable energy company using platform investment. “The advantage of investing using this model is that investment is at par (if it is a blank sheet company, that is, if it has no track record) and the returns are high,” said Mr Parthasarathy.

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