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Calendar 2011 has been marked by a high number of investments and low volumes of exits for the private equity industry as compared with last year. Although the year saw good valuations on offer for private equity investors, it was difficult to exit from existing investments, say analysts' reports.
Private equity deals adding up to nearly $8.6 billion were seen in 2011 as compared with the $8.2 billion worth of deals last year, said the KPMG India report on Private equity investments and returns in India.
“The number of investment deals done in a year does not say anything about the private equity industry. Exiting the deal with good returns is something that matters to most investors,” said Mr Avinash Gupta, Leader, Financial Advisory, Deloitte in India.
Top sectors
The top sectors for private equity investment in 2011 have been real estate and infrastructure management, automotive, power and energy, banking and financial services and information technology. These sectors contributed to around 67 per cent of the total deal value for the year, said an annual deal-tracker report from Grant Thornton.
About 22 per cent of the total private equity investments have been in the real state and the infrastructure sector, 13 per cent in the automotive, and 12 per cent in the power and energy sector, the report added. High deal values were seen in March, May and June totalling to $1,544 million $1,142 million and $1,000 million respectively.
PE deals
The top three PE deals in 2011 have been of Bain Capital, Government of Singapore investing $848 million in Hero Investment, Apollo Global Management investing $284 million in Welspun Corp and Texas Pacific Group investing $257 million in Shriram Capital, said the report from Grant Thornton.
A cause of concern this year was that PE in India had a gross Internal Rate of Return (IRR) of 17.9 per cent, the KPMG report said. Net of manager fees and costs, the IRR falls below the Sensex return, and well below the implied return of 25 per cent PE funds tend to seek on a typical five-year investment, said the report.
The exit deal volumes on the other hand nearly halved in 2011 as compared with the exits in 2010.
“Exit value for 2011 (up to September 2011) was less than half of the PE exit value witnessed in 2010, while exit volume too lagged behind and was only 53 percent of exit volume in 2010,” said the KPMG India report.
Reasons for low exits
Analyst reports are attributing the low volume of exits in 2011 to the close connection between the fluctuating stock markets and private equity exits. Factors such as slow economic growth and inflation may have also led to these low exits, say reports.
A survey conducted by Protiviti India and Asian Venture Capital Journal (AVCJ) shows that conventional exit routes like IPOs were not used by investors.
The recent volatility in the stock markets has caused dormancy in the IPO market and historically unsuccessful promoter buybacks. Secondary and strategic sales were the preferred exit choices of respondents in 2011, the survey showed. The maximum number of private equity exits was through secondary sales as compared with the multiple exits through buybacks last year.
“The year 2011 was overall better than expected. The next year looks like it will be similar to this year. The same sectors look appealing for the next year as well,” said Mr Gupta from Deloitte, India.
The most promising sectors for PE/VC investments over the next 12 to18 months are pharmaceuticals, FMCG, education, energy and banking/finance. Investment opportunities in listed entities such as PIPE — private investment in public equity deals are also looking attractive, said the survey by Protiviti India and AVCJ.
Recent changes in the takeover code may lead some PEs to more favourably look at PIPEs. Respondents were overwhelmingly in favour of investing in unlisted entities, the survey added.
Challenges
However, investors are of the opinion that there are many challenges that they continue to face in 2012. The most significant challenge that India focussed funds in the next 12 to 18 months face is – exiting existing investments followed by finding quality investment opportunities in the country, said the survey by Protiviti India and AVCJ.
Apart from investing in listed companies, private equity investors are shifting their focus to Small and Medium Enterprises (SMEs) and other unlisted companies. “Due to better opportunities and valuations, the SME sector looks attractive. In terms of deal size also, small and medium sized deals will continue,” said a private equity investor.
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