New Delhi: Increasing enthusisam for globalization coupled with government initiatives for further liberalization of its regulatory environment towards private investments, have inspired 40 US Venture Capitalists (VCs) and Private Equity holders (PEs) to raise capital to the extent of $ 400 million (Rs1,800 crore) and place it heavily in Indian start ups, according to a joint Study undertaken by Assocham and Earnst & Young.
The Study on Indian PE/VC Market Firing on all Cylinders – Liquidity All Round has concluded that VCs such as Intel, CISCO, Motorola, Sequioa Capital, Oak Investment Partners, Matrix Partners, Trident Capital, Sherpalo Ventures, Bessemer Venture, Walden International, Canaan Partners, International Finance Corporation, Norwest Venture, Gabriel Venture, Draper Fisher Jurvetson have successfully generated $400 million to invest in India as its market has developed an appetite for innovations and entrepreneurship across various industry verticals.
PEs conglomerates comprise Warbugs Pircus, General Atlantic, Carlyle, 3I, Temasek, Kohlberg Kravis Roberts, Blackstone, Goldman Sachs, Providence Equity, Macquire and Francisco Partners.
Assocham and E&Y have jointly forecast that number of such VCs would more than double in US alone and multiply manifold among economies of scale for India in 2007-08 as corporates, PEs and VCs across the globe are growing enthusiastic to invest in India to realize the potential of its booming financial markets.
According to the study, total PE/VC investment in India reached record high of $7.5 billion (Rs33,750 crore) in 2006 as compared to $2.2 billion in 2005. The first three months of 2007 have seen VCs activities worth $2.4 billion coming into effect in India through 78 deals.
The overall level of PE/VC deal activity is even more telling if one takes into account that in comparison with the more mature US and European markets, level of PE activity, mainly on account of very modest buy-out volumes, is still modest, leaving significant room for further growth. During 2006, buy-outs accounted for only 5% of total number of transactions and 15% of overall transaction value whereas in mature Western markets, buy-outs typically account for 75% to 80% of overall transactions value and combined PE/VC funds raised.
This is partially driven by the rapid pace of development of the Indian economy, creating ample growth opportunities for early or mid-stage ventures and late stage development capital.
It is also partially driven by regulatory aspects (cumbersome delisting regulations) as a result of which conducting public-to-private transactions is not easy. Furthermore in western markets buy-outs funds typically raise any where between 50-80% of the overall deal value in the form of loans (“leveraged finance”) which is secured against the targets balance sheet.
On evaluation of PE/VC in India, the study points out that the history of PE and VC industry in India entwined with liberalization has gained significant momentum in 1991. Until the mid 1990s, the need for private equity was met largely by development finance institutions such as IDBI, ICICI and IFCI.
It also points out that several foreign PE/VC firms such as Warburg Pincus, CDC Capital, Baring Private Equity Partners, Draper International, HSBC Private Equity entered the country. The PE/VC activity roughly started in 1996-97 and gained momentum in 1999 and 2000, on account of overall boom in Information technology, Telecom and Internet sector.
On account of sustained GDP growth of 8% to 9% on a year-on-year basis and high growth momentum in certain sectors such as IT, telecom , high end manufacturing, pharma, retail and financial services international investors renewed their interest back in India.
After 2000 there has been a continuous up tick in the total value of investments in India. Investments of $1.67 billion (Rs7,515 crore) in 2004 surpassed the previous high of $1.16 billion(Rs5,220 crore) in 2000. These investment reached $2.2 billion (Rs10,000 crore) in 2005 thus showing a growth of 38% on a year-on-year basis. However real quantum leap came in 2006 which saw record investment of $ 7.5 billion, showing growth of around 300% over the previous year.