Private equity investments in India, which saw a sharp dip in 2009, could bounce back in 2010 with several large global and local funds in active talks with promoters and managements of firms to put in money. Private equity fund managers, or PE fund managers as they are popularly known, and investment bankers say this year could see increased activity at various levels as several Indian companies have reported robust results despite a testing economic environment. Besides fresh investments and divestment in existing companies, PE funds could also partner Indian companies for global acquisitions and also local buyouts.According to Venture Intelligence, a research service focused on Private Equity and M&A, deal flows plunged to $3.82 billion in 2009 from $10.2 billion in 2008 and $13.6 billion in 2007. Private equity investment tapered off in 2009 as fund managers turned cautious. Of the two sectors that had chased private equity capital — real estate and power, there were policy issues related to FDI in realty while in the power sector, valuations were too high, says Rajeev Gupta, MD and head of the India buyout team of Carlyle, one of the global biggies in the business.
PE fund managers also chose to wait on the sidelines as equity valuations recovered too fast in the second half of 2009. According to Anil Ahuja, head of Asia-growth capital, 3i, from the second half of 2008, till around April-May 2009, money was not being deployed as everyone sought to conserve capital. “As PE investments gets benchmarked against public markets for valuation of their holdings, most PE funds were actually running serious losses. The natural response was to put new investments on hold and work more closely with portfolio companies. Also from July onwards, valuations were too high.” Says Ashok Wadhwa, group CEO of Ambit — a home-grown investment bank: “Many of the mid-tier corporates are looking to raise capital. However, PEs will face severe competition from public markets.”People like Ahuja believe that the Indian economy is “fundamentally sound and is sitting on a sweet spot. It’s a good place to be in and 2010 could see more deals if markets continue to be stable.” Gupta of Carlyle feels that in 2010, capital needs of the economy will be broader because the investment cycle is clearly on the upturn. “Expectations of growth are back at Indian corporations, which means investment plans, which means capital raising,” he adds.
Incidentally, both Ahuja and Wadhwa feel that this year there could be divestures by PEs. “Many of the PE investments were done around 3-4 years ago, and for the past 18 months, they were not able to divest their stakes in companies,“ points out Wadhwa, adding that “the year would also see PEs partnering Indian companies for global acquisitions. There is still a paucity of bank funds and leveraged finance.”Even smaller funds are getting ready to invest after being in talks over the past few months. Sage Capital, which had closed its fund at the peak of the credit crisis at $90 million made its first investment at the end of December. It has invested Rs 50 crore in Concord Enviro Systems. It is also looking to make a couple of more investments in the next couple of months for another $43 million. Manish Kanchan, CEO of Sage capital, expects to see deals happening in water, oil drilling, energy, green technology and pharma.2010 could also see a drop in the number of private investments in public equity, or PIPE, according to both Ahuja and Gupta. “India will remain essentially a growth capital market for PE funds in 2010. The one change in growth investing, however, is that while in the past, PIPES constituted a large proportion of growth capital investments by PEs, there is a structural shift away from Pipes (which is healthy). So growth investments in 2010 will tend to be in private companies (which is the classical PE mode),” says Gupta. Ahuja is betting on infrastructure, along with the consumer space (branded goods, healthcare and financial services).There is a feeling that buyouts may also happen this year. “The policy case for buyouts in India is overpowering. But policies now in vogue could restrict the ability of firms to leverage. Several entrepreneurs and experienced managers in their mid 50s will gladly make risk investments if they see viable and fair exits in a decade,” adds Gupta.