Mumbai: Private equity (PE) investors, including early-stage venture capitalists, have poured more than $433 million (Rs1,775 crore) into environment-related businesses, primarily wind energy and clean fuel, in the country since 2001.
The number, though minuscule in the context of the estimated $7 billion that was invested overall by PE investors last year, is a significant achievement for the cash-strapped sector. Investors and advocates said that closing investments in such businesses is still difficult but expect the pace to pick up in the next five years.
So far, investors have put down an average of $33 million into companies that, for example, turn sugar into clean fuel or make cars that run on an electric battery. Overall, investments favoured wind energy, which saw four companies receive funding worth $224 million, and clean fuels, where five companies got $141 million (see accompanying table).
A large portion of the investment dollars were focused on a handful of companies including Suzlon Energy Ltd, Aryan Coal Benefications Pvt. Ltd and Natural Bio-energy Ltd—two of which received more than one round of funding.
A majority of the deals— 56%—were closed last year. This mirrors trends in the US market, where investments grew from $820 million in 2005 to $2.36 billion in 2006, according to Venture Power Newsletter on venture capital investment in clean energy. Most investors are driven by the domestic need for power and water in India, and making that energy supply sustainable as the country develops. “People are looking at India as a market for things, not as a source for things,” said Vineet Buch, principal at Menlo Park, California-based venture capital (VC) firm BlueRun Ventures. “Where there is a market, domestic supply will emerge.” But, there is also the potential for a broader market as the world continues to draws its attention to climate change and conserving the environment.
As such, investors are betting on the continued shift in consumer habits towards eco-friendly products and corporate habits geared towards energy efficiency. They also see the opportunity to integrate work in India, particularly around solar energy and water management, with efforts in countries such as the US, Israel and China.
All these factors—and the chance to make a social contribution—fuels their growing interest in ‘green’ investments, although there are still many hurdles to closing deals.
Wind energy has held the attention of investors here because it was considered a proven investment. This segment is now considered comparatively mature and many have started looking to other areas.
“India has already seen its wind industry develop rapidly, and looking at China, where solar production and installation are increasing rapidly, India certainly has great potential here,” says Dan Kammen, professor in the energy and resources group at University of California, Berkeley. Many investors see India’s potential in tapping solar energy as even greater than wind, given that its sunny days are around 93% of the year and can be more easily distributed. Companies doing work in biofuels also will continue get attention.
“Anyone who has a biofuel plan, they are sold out,” said Buch. “They sell every litre they manufacture.”
These companies also are very intrigued by batteries and hybrid technologies, for example making electronics powered by the sun. Although clean technology refers to energy, investors often group non-energy, but environment-related businesses into the mix when they think of ‘green’ investments. This includes companies that work to conserve, maintain and distribute clean water or make organic products. Investors have few limits when it comes to the type of businesses they will look at when it comes to the environment play. The obstacles come in when they start talking about the size of investment, returns and time frames.
In most cases, such investments still are in the realm of VC because the size of investment needed matches their requirements (under $5 million).
But, as seen from the past deals, those that get closed are often larger. This mismatch between investor interests and start-up needs has stalled deal-making on its tracks. Returns are also lower— 10-20% against the 30% plus that VCs in India need to achieve.
Many companies in renewable energy will not get off the ground for at least five years.
Pankaj Sehgal, director of technology investments, Delhi-based Sun Group, says: “When you look at each technology, you have to look at the value delivery chain.” Other suppliers, for example, may not yet exist, or the whole process cannot yet come together at a sellable price.
Investors also need sound technical understanding and a network, given the nascent stage of development of these new areas. Despite these obstacles, investors have been flooding this space for the last year. Sandeep Singhal, partner at Nexus India Capital Advisors Pvt. Ltd, sees renewable energy as part of his play into investments with unique intellectual property.
Rahul Khanna, director of VC fund Clearstone Venture Advisors Pvt. Ltd, considers these investments in line with his focus on consumer-related investments.
Khanna says, “India shouldn’t have to go through the same cycle of consumption and wastage that some of the other developed countries have gone through.”