Private equity activity continues to be buoyant

The buoyancy in private equity activity in the country seen in 2010 has spilled over into the New Year with a strong performance in the first quarter of 2011. This is good news for entrepreneurs and companies looking to raise PE funds to fuel their growth plans.

The strong performance in PE activity in 2010 came on the back of what the industry calls a despondent mood in the previous year. And, private equity players expect 2011 to be a good year with quite a few exits and higher investments by PE players, in early- and growth-stage companies.

Says Mr Kanwaljit Singh, Managing Director, Helion Advisors: “While 2009 was a year of introspection and apprehension, 2010 showed no such signs and 2011 will continue to hold the promise.” Helion is a $350-million India-focussed, multi-stage venture fund that invests in technology-powered and consumer service businesses.

His views seem to be more or less authenticated by private equity activity in the January-March 2011 period, going by figures released by Venture Intelligence, a Chennai-based information provider on private equity and mergers and acquisitions transactions in the country.

PE investments rise

According to Venture Intelligence, PE investments jumped to $3.3 billion in the first quarter of this calendar, with the amount invested more than doubling over the previous quarter; the median deal size itself jumped to $14.5 million.

Of course, one single deal accounted for a little under a third of the money invested in the period under review; the about $1 billion (Rs 4,500 crore) commitment by Bain Capital and Singapore's GIC to Hero Investments, the holding company of the Hero group, to fund its buy-out of Honda Motor Company's 26 per cent stake in its joint venture two-wheeler company Hero Honda Motors Ltd.

According to Venture Intelligence, PE firms invested about $3.3 billion across 83 deals. This is much higher than what PE firms pumped in during the same period last year – $ 2.1 billion in 81 deals – and over twice that of the immediate previous quarter – $1.5 billion in 83 deals.

Says Helion's Mr Kanwaljit Singh: “2010 saw a steep rise in domestic consumption and an insatiable appetite for consumer services, especially in education, food, retail and wellness. E-commerce saw a lot of activity with the Makemytrip IPO, the emergence of Flipkart, and investments into fashion industry start-ups such as Fashionandyou.com and Exclusively.com. In the health sector, one saw a variety of specialised services being launched in the retail format – dental, ophthalmology and even day surgery centres.”

Information provided by Venture Intelligence shows that PE firms invested nearly $8 billion in about 325 deals in 2010, against a little over $4 billion across 290 deals in the previous calendar year. The PE activity in 2010 was almost back to the 2006 levels (which saw 358 investments worth nearly $7.5 billion), after a volatile three-year period.

For the first quarter of this calendar year, according to Venture Intelligence, the amount invested by PE firms was the highest since first quarter of 2008. “This combined with the rising number of exits, successful raising of new PE funds (like the $500 million second fund by Everstone) and the accelerated pace of investments in the manufacturing and infrastructure sectors, indicates strong revival in confidence for deploying long-term PE capital in the country,” Venture Intelligence said in a release.

The last calendar year was also one of successful exits for investors, as a number of venture capital or private equity-backed companies went public or were acquired, SKS Microfinance and Pangea3 being good examples. “Thus, the year witnessed a complete cycle of investment for VC/PEs, with a healthy dose of investments as well as exits,” says Mr Singh.

Adds Mr Karthikeyan Ranganathan, Partner, Baring Private Equity India Pvt Ltd, PE activity tends to be cyclical simply because there is a herd mentality – 2009 was a dull year after the high in 2008. But it picked up in 2010.

“We are seeing a lot of deal flow at this point of time. We are seeing transactions in power, infrastructure and pharma,” he adds. Baring manages nearly $1 billion and invested nearly $150 million last year in three companies – Muthoot, Shilpa Medicare and Cethar Vessels.

Technology companies and the IT/ITeS space continue to attract a bulk of private equity or venture capital funds, with the manufacturing sector being not too attractive an option for this category of investors. Is there a skew in this? “Not at all,” says Mr Ranganathan, “funds availability for the manufacturing sector is not an issue.” Last year, he adds, a lot of money went into the power and infrastructure space. However, in terms of volume of transactions, it is still the IT/ITeS space.

The appetite for PE/VC funding will only go up as the scope for entrepreneurs increases. As Ms Bharati Jacob, Partner, SeedFund, an early-stage venture capital fund, points out entrepreneur activity is going up substantially every year. A lot of people are quitting their jobs and starting out on their own, including those who are not from families with a business background.

More opportunities

This, she reasons, is due to more opportunities, availability of funds and easier access to early-stage capital. Besides, technology and the Internet have made starting and running businesses much easier. There is no licence raj or no quota system, she says.

According to Ms Jacob, the deal flow is even more robust with a lot more early-stage investment happening. The bulk of the funds are going into the services sector, healthcare, education and retail. There was the impression that there was not much money to be made when one invested in early-stage companies.

This too has changed and more funds are flowing into early-stage companies, although it is still skewed in favour of growth- or late-stage ventures. Exits have also become easier, which makes investing even more attractive for PE and VC players.

As Helion's Mr Singh says, “2010 has set the platform for exits of investors from companies and 2011 should see at least 12-24 exits.” He believes investments will continue to grow this year, especially in the consumer services space. E-commerce coupled with mobile commerce will see a lot of activity with the latter picking up momentum.

“The domestic market is where all the action is with entrepreneurs jumping in with ideas that might steer entire markets. Thus, investors would do well to keep a keen eye on developments on this front,” adds Mr Singh.

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