SAN FRANCISCO - The U.S. recession and slow global economy have created big opportunities for investments in promising green start-ups, an area that at one time had lofty valuations, Silicon Valley venture capitalist Steve Westly said.

Westly, a former California state controller and eBay Inc executive, said he is seeing some great quality of deals.

Two years ago when we were investing, there was huge competition and people had bid the market higher, Westly said in an interview this week. Because of the recession, we think entrepreneurs' expectations have moved back to reality.

He said: It's a terrible time to raise money, but we think this is a great buying opportunity.

Westly, founder of Menlo Park, California-based Westly Group, is currently in the process of assessing business plans of green start-ups.

Westly Group closed its second fund, exceeding $127 million, in December and has already invested about half of that money in diverse green technology companies, including light emitting diode (LED) fixtures start-up Lunera, solar cell maker Solexel and smart grid company Eka Systems.

The fund's investors include pension funds, strategic investors and high net worth families, with the principles committing over 20 percent of the capital of the fund.

Westly is especially excited about the potential of California start-up Lunera, which makes ultra-thin LED lighting units for offices.

The commercial market for LED lights is huge, he said, adding that Lunera is growing rapidly.

Looking forward, Westly said he expects many more investors to come into the green space in 2010.

Green technology is not a bubble and is not going away, he said. It has the potential to become one of the largest sectors.

The only thing that held the industry back is a lack of IPOs, he added.

After a first round of initial public offerings, mainly by solar companies, in 2006 and 2007, the market for green IPOs has been slow.

The financial market turmoil following the collapse of Lehman Bros. in the latter half of 2008 virtually shut down the IPO market.

The appetite for IPOs has picked up since mid-September this year and the sector saw the successful debut of lithium- ion battery maker A123 Systems Inc.

Already a few green technology companies have filed registration statements for IPOs, including solar firm Solyndra Inc and biofuel firm Codexis Inc.

Westly says some widely expected high-profile green IPOs, such as Silver Spring Networks, would ignite the market this year.

He also expects a lot of activity in the electric and plug-in hybrid vehicle sector, including lithium-ion batteries.

And: The area I am most intrigued with is green building materials, he said. It's not very sexy and is a blue-collar space that most people overlook.

Silicon Valley is finding high-tech ways to make age-old materials, such as energy-efficient ways to make concrete, windows that insulate better than walls, and wood substitutes.

Although the field is new, the green building materials sector is gaining attention and growing fast.

Some surveys and studies estimate that the green building materials market is expected to reach as high as $500 billion in the next decade.

The dollar amounts are huge and the opportunity is great, Westly said.

(Reporting by Poornima Gupta, editing by Gerald E. McCormick)