After a bumper year in 2006, private equity fund-raising in India is now seeing a correction. Private equity and venture capital firms have raised $203.1 million till date in 2007, roughly one-tenth of what they had done ($2.2 billion) in calendar year 2006.
While 2006 saw plenty of new funds being raised for the India market—an informal estimate puts the total at 17 funds—private equity activity this year will focus less on raising new money and more on the deployment of existing funds.
Fund-raising has not been easy, particularly for many of the new funds announced in recent months. Most of the hot investment sectors—technology, real estate, consumer services, infrastructure—are already crowded and differentiation among funds has become difficult.
“Limited partners are asking why you will succeed when there are 10 funds in the same space,” says Kanwaljit Singh, managing director, Helion Venture Partners
The correction can partly be attributed to the fact that most large-cap private equity firms such as ChrysCapital India Advisors and IDFC Private Equity have completed their fund-raising between 2005 and 2006.
“This is the fifth year of the capital markets bull run and there is a lot of money in the market. So, limited partners (institutional investors and individuals who invest in private equity funds) want to see it deployed first,” says K.P. Balaraj, managing director, Sequoia Capital India in Bangalore. Sequoia is investing $400 million out of a growth fund it had raised last year.
Incidentally, early-stage funds, which invest in start-ups and growth-stage companies, have had a good run with fund-raising, though that segment too is seeing a correction.
Out of the $3.5 billion raised in private equity money in last three years, $2.29 billion is early-stage money. This is the second highest raised in the Asia Pacific region after China, including Hong Kong.
Apart from Sequoia, Helion Venture Partners in Bangalore and Matrix Partners India in Mumbai raised $140 million and $150 million early-stage funds, respectively, in 2006 and have deployed about 20% of their corpuses each in the last 8-12 months.
India is now the third-largest private equity market in the overall region in terms of funds, after China and Japan. This is only the money that has actually been raised or committed. The quantum of funds announced but not raised yet runs into almost $10 billion.
There are also several firms that invest here out of global corpuses but do not allocate specific funds to India. Bangalore-based Footprint Ventures, for example, which is backed by investors in the US and Israel, has been in the market for over a year and is yet to make its first investment.
“A majority of the new funds testing the market would prefer to have a regional, say, Asia Pacific fund rather than a local fund,” says Sanjeev Krishan, executive director of consultancy PricewaterhouseCoopers India. Others in this category include Hong Kong-based SAIF Partners and UK’s 3i Capital. Even long-time India investors, such as General Atlantic and Warburg Pincus, invest out of global funds.
This year is also seeing a slight shift in profile of private equity investors. In 2006, significant funds were raised by European and West Asian investors. Now, “many of new funds in the pipeline are backed by US limited partners who are typically more cautious in their approach. They also understand the Indian market better,” says Avnish Bajaj, managing director, Matrix Partners India.
Losing Flavour (Graphic)
Fertile Ground (Graphic)