PE investors still find it hard to get clean-tech deals

PE investors still find it hard to get clean-tech deals

Bangalore: 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).

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“There are two kinds of deals in India in this space—a form of implementation play and smaller tech-innovation deals. It is an implementation versus innovation game here," he said. “Most large PE deals are in the implementation side. VC’s focus is on innovation."

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."

Clean and green technology refers to any energy, water, transportation, manufacturing or agricultural mechanism that minimizes emissions and reduces waste, by including recycling, water purification, sewage treatment, solid waste management using renewable energy in their processes.

Factors such as increasing population, rising oil prices and?growing?concerns?over carbon emissions are spurring investments in clean-tech firms.

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."

Investors nevertheless compare the clean-tech business to India’s IT industry during its fledgling years a decade earlier. “These small (IT) companies started catering to selected niches, for example, online travel portals. Yatra (Online Pvt. Ltd) has become nearly a $1 billion company; it’s a segment of IT. This is what investors are looking for in clean tech," said Shah.

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.