Private Equity in India: Poised for growth
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4 May 2011Muralidhar Dasar
The year 2010 was a good one for PE in India. India posted the highest growth rate in PE deal value among all major economies in Asia-Pacific, clocking 111% growth, ahead of China’s 56% growth. The deal activity in India doubled to about US$7.4 billion, compared to US$3.5 billion in 2009. The past decade saw enormous growth in PE investments, which increased from US$1.2 billion in 2000 to US$7.4 billion in 2010, registering a CAGR of 20% during this period. However, the credit crisis of 2008 threatened to stall the growth in deal activity, because the crisis had a clear impact on PE activity in India. Deal values dropped considerably starting Q4, 2008. The lull lasted five quarters before the deal values were restored to pre-crisis levels in Q1 2010. The total deal value in Q1 2011 has shot up to US$3.3 billion from US$1.4 billion in the previous quarter, a 142% rise. With the economy poised to grow at around 9%, and the IMF providing a close growth forecast figure of 8.3% for 2011, investors are upbeat about growth prospects. The year 2011 has clearly begun well, and the deal activity is expected to continue into the next quarters. According to industry estimates, there is US$20 billion of committed, unused capital yet to be deployed in the Indian market, which already makes supply constraint a non-obstacle. The PE landscape in India is highly dynamic, and more often than not, it systematically responds to macroeconomic cues, domestic and global, and indicators such as interest rate and inflation. It is interesting to note that in spite of its dynamic nature, there is a striking characteristic that continues to persist. The average deal size has mostly flickered around US$25 million since 2004. The quarter-on-quarter figures since Q3, 2008, as shown in the Figure, do not show much variation in average deal size. It suggests a mindset that a majority of PE deals target minority positions. Tighter regulation on buying large positions in publicly listed companies could be one factor that is keeping the average deal size low. Infrastructure was the star sector for PE investments in 2010. The aggregate deal value in infrastructure stood at US$2.3 billion, accounting for 32% of the announced deal value. The power sector is emerging as an attractive segment within infrastructure, with PE funds looking to capitalize on the demand-supply gap. India is currently power starved; industry estimates suggest that the energy availability of 750,000 million units (MU) fell significantly short of the demand of 830,000 MU during 2010. PE firms are chasing investment opportunities as India expands its power generation capacity. Infrastructure is followed by telecommunications, where the aggregate deal value stood at US$823 million. A close third position was taken by the financial services sector, which registered an aggregate deal value of US$820 million. In terms of volumes, technology sector saw the largest number of PE deals. Q4 2010 was particularly favourable to the technology sector, with the total deal value more than trebling when compared to Q4 2009. Technology is expected to continue leading PE deal volumes in 2011 as well. There are several challenges facing the PE industry. The regulatory challenge is foremost, followed by political pressures (especially in infrastructure sector) and volatile macroeconomic factors such as high inflation. The current regulation is particularly unfavourable for picking up large equity (over 15%) in publicly listed companies. Moreover, private equity is not treated as a separate asset class, which makes its treatment under securities and tax laws complex. Lack of meaningful exits was criticized as an impediment, but 2010 has proved it wrong. PE exits in 2010 stood at US$5.3 billion, and the exit volume registered at record high of 120 exits during the year. Strategic sales emerged as an important exit mode, with 26 deals choosing this route. The strong record of exits should boost investor confidence and fuel the next round of growth in 2011. The Indian PE industry is maturing. The attitude of promoters towards PE/VCs is changing, and there is greater recognition of the value that PE/VCs bring to the business. Although obstacles such as divergence on valuation expectations between promoters and investors, a tough regulatory environment, and inflation concerns remain, the fundamentals are intact. The PE industry is set for aggressive growth in 2011.