Leading chamber ASSOCHAM said that private equity investment in India has rebounded after a lull due to global financial meltdown with energy sector being the biggest draw.
In calendar year 2010, private equity and venture capital firms invested USD 7.97 billion in 325 deals (excluding real estate) as against USD 4.07 billion in 290 deals during the previous year.
The Associated Chambers of Commerce and Industry of India said that the energy sector was the biggest draw with 34 investments worth USD 2.14 billion while IT and ITeS with 79 investments worth USD 696 million topped in terms of volume. Banking, financial services and insurance with 44 investments worth USD 1.04 billion stood second on both counts.
Buyback was the preferred route last year with deals worth USD 1.7 billion. The next preferred routes were open market (USD 1.5 billion) and M & As (USD 1.2 billion). Exists totaling five billion dollars took place in 2010 through 164 deals against 103 exit deals worth USD 2.1 billion in 2009.
Besides contributing finance an important ingredient of success PEs use their network and experience to create new growth opportunities, and assist in enhancing professionalism and corporate governance of investee company required to reach next growth level.
While the industry has witnessed difficult times, five Indian funds managed to raise 1.5 billion dollars, highlighting the fact that limited and general partners look at diversification of risk across industries and geographies given a fund’s teamwork and potential not only individual track records.
A point to consider for PE investments is the ability of minority stakes in family-owned businesses to deliver sustainable and reliable returns going forward. As the market matures, the likelihood remains that a shifting business culture coupled with demands of limited partners and global institutions will bring about significant changes in both the nature of deals transacted and the relationships between general partners and investee companies.
The ASSOCHAM said India could well do with more pure-play specialist infrastructure funds with long-term investment horizon and reasonable return expectations (in the mid to late-teens). While a couple of SPV-level investors are currently operating in the country, there is room for more such players. These funds globally list themselves to provide an exit opportunity to investors without the fund having to exit the underlying investment through an IPO or otherwise.
With valuations now stabilised and bank finance difficult to come by, general partners report a renewed interest in private equity deals on the part of business owners. The chamber said there will be increased interest from foreign companies looking at buyouts in India as they are aggressively looking to expand growth markets. They are willing to pay a premium for the right assets and Indian promoters see them bringing in vast experience and technology apart from capital.
But buyout opportunities will be limited by ownership structure of Indian businesses. Most are family-owned and although their shareholding founders are now willing to exchange equity for cash, they wish to retain control. Thus majority of PE deals are minority investments rather than buyouts.
However, there will be more exits in 2011 as compared to previous years as portfolio companies are getting matured. A good number of secondary sale investments are likely to happen.
