Indian VCs have not really done a good amount of investing in cleantech. Cleantech perhaps is not really a VC game as it is more of an engineering related discplie that does not offer the types of scalabilitiees that VCs desire or the exit periods. VCs also do not understand cleantech well enough to take calls.
Many cleantech deals, especially in the power segment, are PPA based, with limited upsides, not typical VC games. Many cleantech and renewable energy startups require capital that is much higher than what VCs can typically offer to invest. Predictions for Cleantech VC in 2011 – Kachan & Co.’s Dallas Kachan looks at what 2011 will have in store for cleantech (http://alwayson.goingon.com/node/66783 )
Sustained worldwide venture capital investment will continue to cede importance to corporate and non-institutional capital. A return to early stage venture investments – predict a return to early stage venture capital investing in cleantech in 2011. Energy efficiency emerges as the clear rock star of cleantech. Biofuel investment could reach former highs. Recycling and mining will attract more investment. Natural gas emerges to threaten solar and wind for utility renewable power generation. China becomes the most important market for cleantech: if you’re not selling in China, you won’t matter.
There is a significant amount of interest among PEs for investments in both traditional and renewable energy. PEs – not surprisingly – are not very keen on risky technology bets in renewable energy, but are OK with business model risks. Some of the PEs (such as IFC, ADB etc) are willing to take fairly long-term views (with over 10 year horizon).
Investment sweet spot ( in terms of the quantum) varies from fund to fund, but obviously for most of the blue-chip, it is upwards of $50 million. PEs are well aware of the regulatory and societal bottlenecks that could arise in large-scale energy sector investing (especially for coal-based and large-hydro based sectors). Many PEs are clear that they wish to invest in businesses that can stand on their own revenues (even if takes a while) and are not keen on business plans that rely on getting bought out.
Most every PE acknowledged that while they might not like coal, it is here to stay as the largest contributor to power for the foreseeable future. PE arms of organizations such as IFC and ADB, while not shutting out the option of investing in coal-based or natural gas based power plants, have a mandate to decrease their exposures to these “non-green” sectors. What a PE can bring to the table – Many private equity funds have been able to provide not just the financial support required but also strategic support and value-add for the firm’s growth.
Disconnect in Valuation expectations – one of the issues faced by PE players while investing in cleantech companies is the disconnect in valuation expectations between the entrepreneur and investor with the buoyant public markets resulting in an increasing buoyancy in expectations! PEs feel that entrepreneurs should take a longer term view while setting their valuation expectations.
Currently, 80% of infrastructure projects, and 46% of power projects, are funded by the banking system. So, PEs constitute only a small share of the infrastructure projects. While private equity folks could like IRRs of about 25%, power and infrastructure IRRs is only about 12%. Some private equity companies might wish to play a consolidator’s role as well where they consolidate a diverse portfolio of (say) energy companies such that they win even if 7/10 companies do well enough.
Investors such as IFC have specialists/experts in every project to take care of social and environmental aspects. Private equity funds are interested in the macro factors (demand supply gap in electricity et al) as well strategic micro factors. One of the factors that seem to interest PEs is the method for companies to go diversified on green power that is having assets in wind, small hydro, biomass etc together, instead of betting just on one thing alone.