PE firms’ growth rate will remain intact this year

Despite the challenges being faced by the global economy, the Indian Private Equity & Venture Capital Association feels that investments by private equity and venture capital funds in India this year would maintain its last year’s growth rate of about 40 per cent.

Private equity firms closed about 530 deals in 2011 worth $14.8 billion, almost 40 per cent more than the previous year. Bain and Co, in its India Private Equity Report 2012 released recently, had predicted a tempered growth of 20-25 per cent in the PE industry. The report is based on a survey of 65 PE and VC investors.

“I am bullish on PE investments in India this year as the Indian growth story is intact. The growth could, however, be higher if certain tax hurdles facing the industry are cleared,” Mr Mahendra Swarup, President of the Indian Private Equity & Venture Capital Association, feels.

In fact, June 2012 saw PE funds announce an investment of about $763 million in 35 deals, nearly double the investment value announced in the previous month. This, according to industry analysts, is the highest commitment from these funds during the last 12 months or so. Of these deals, at least three can be bracketed under big-ticket ones, involving over $50 million.

Mr Swarup said in the last five to seven years, the total amount raised by these funds was $80 billion, out of which $60 billion has so far been invested. Another $70-80 billion is in the process of being raised, with 90 per cent of this coming from overseas. “Depression for a long-term player can be an opportunity for investment. If you ask me, this is the right time to invest,” he said.

Incentivise ventures

Uncertainties in the Indian tax regime and limited investment opportunities for foreign investors, however, are limiting growth in the PE sector. “The Government should realise that for unlisted companies and emerging entrepreneurs, PE industry could be a strong source for funding. It can also create new enterprises and start-up ventures. Hence, these funds need to be incentivised,” he said.

He predicts that there could be a shake out in the industry in the form of consolidation, with smaller funds (of below $100 million) either slipping into oblivion or becoming part of the big-ticket ones.

There would be an increase of 20-25 per cent in the number of exits, even though valuations are lower today. This is because investors would seek returns from the pre-2007 transactions. The Bain report had revealed that there had been a drop of 30 per cent in the number of exits in 2011 over the previous year.

Mr Swarup does not see the recent SEBI diktat directing alternative investment funds to stop raising money till they register with it again impacting fund raising process. “This will not in any way hamper the fund raising process. For the domestic industry to grow, you need a suitable regulatory environment.”

Last month saw at least five successful fund raising, including $182 million by ASK Property Investment Advisor and $127 million by Global Environment Fund.

Emerging trend

Another trend that is emerging is that PE funds are getting more involved in the management of the company they invest in. “Indian enterprises should also realise that PE funds are not bankers. Fund managers do expect returns and they have to be more involved in the companies’ management,” he said.

Yet another trend is that the deal sizes, which were smaller earlier, will now increase. There is also renewed interest in early stage funding, especially in new technology, IT and biotechnology, apart from education and FMCG sectors, he said.

Early stage funding had been insignificant in the last three to four years in India. This category of funding usually involved an investment of between $1.5 million and $5 million. The renewed interest in this space can be traced to the increasing competence of PE and VC funds to hand hold new, emerging entrepreneurs.

Mr Swarup predicted the emergence of new funds in niche segments in the next three years. Currently, there are some 425 PE and VC funds, out of which 220 are active and 120 very active doing an average of 2-3 deals a year.