Mumbai: At least $17 billion (Rs79,220 crore) of private equity (PE) money is waiting to be deployed in India because there just aren’t enough sound investment options. The amount could be as high as $25-30 billion, including foreign firms that don’t have India-focused funds but invest in the country from their global pool of capital.
Blackstone Group Lp, Carlyle Group, Kohlberg Kravis Roberts and Co. are those who belong to the second category.
PE investors are concerned that the capital overhang will stretch the valuations of target companies as they compete for quality deals that are rare in the market.
Ahmed Raza Khan/Mint
Slow investment also means that so-called limited partners (LPs) may reap a smaller return on their investments in PE funds compared with non-PE options. Some funds have, in fact, started seeking extensions of their investment deadlines.
According to Preqin, a UK-based research firm that tracks the alternative investment market, India accounts for 18.8% of total uninvested money—known as dry powder in PE parlance—in Asia. Mint has independently confirmed the figures with most top PE funds operating in the country. A few declined to specify the amount of uninvested money.
Ashish Dhawan, senior managing director and co-founder, ChrysCapital Investment Advisors, says that in any sector the number of private firms that have the size to absorb a lot of capital and grow are very few and “there are already 10-15 PE funds running behind them”.
Deals in such firms, he says, are being done at a premium as high as 25-50%.
Sumir Chadha, managing director, Sequoia Capital India Advisors Pvt. Ltd, says last year was a bad year for the economy in general, but was a good year for investment. “Like any investment, you could buy cheap and sell high later when the markets picked up, but funds didn’t do that,” he adds.
Which is why they are sitting on so much money now. The funds are finding it difficult to deploy the money because the valuation of target firms is increasing with rising consumer demand in an economy that is rapidly emerging from the 2008-09 global slowdown.
It’s a case of too many PE firms chasing too few investment avenues. One of the firms that Sequoia is looking to exit has already received 22 offers from potential investors. Chadha declined to name the firm, but said: “We haven’t seen something like this in our 10 years of investing in India.”
LPs are receiving lower than expected returns on their investment vis-à-vis non-PE options, says David Mountain, a partner at consultancy firm Bain and Co. India Pvt. Ltd. Many investment committees are holding the line quite tightly to make sure funds are not investing at high prices.
While an investment period of three-four years is enough for PE funds to deploy the money raised, some of them which mobilized large amounts in the past two years—between 2007 and 2009—may need to trim fund sizes or extend their investment period.
“Several PE funds have come back and asked for an extension period due to a slow investment year in 2009,” says Anubha Shrivastava, managing director of CDC Group Plc., a UK-based LP that invests actively in Indian funds. “We’ve evaluated such funds and have given them an extension as it’s reasonable to give them more time than pressurising them to just do deals.”
The main reason for the capital overhang was the slowdown in PE investments in the later part of 2008 and in 2009. Deal volumes fell significantly during this period when the stock market fell and entrepreneurs were reluctant to settle for low valuations. They also postponed growth plans until market conditions improved.
Calendar year 2009 saw $4 billion of PE deals in India, according to Venture Intelligence, a research service focused on PE, and mergers and acquisitions. This was significantly lower than deal levels of $10 billion and $14 billion in 2008 and 2007, respectively.
Another reason for the overhang, according to industry experts, is the vigorous fund raising by numerous first-time funds in 2007 and 2008.
“Those were the bullish times when there was capital chasing PE fund managers, with little regard for quality or track record,” says Praneet Singh, managing director of Siguler Guff India Advisors Pvt. Ltd, an LP that invests in PE funds.
A lot of the dry powder includes funds raised to invest in infrastructure, a big magnet for PE money in India.
While it may take three and four years to invest the money, many PE funds are currently raising funds, which means they will continue to sit on idle money. According to experts, about 30 PE funds are raising money to invest in India.
The firms are optimistic about investment levels increasing. “The next two quarters should see big deals and we should be back to the $10 billion level of investment,” says Anil Ahuja, head of Asia, 3i Asia Ltd. In the first half of this year, deals worth $4.5 billion have been struck.
PTI reported separately that PE firms have offloaded stakes worth $1.46 billion in Indian firms during the April-June quarter, according to deal-tracking research firm VCCEdge. It said 30 PE firms divested stakes in the quarter against 29 PE firms that disinvested $820 million in the same period last year. Experts say the increase in exits was driven by profit booking due to the recovery of the markets.
PTI contributed to this story.