New Delhi: This has been an eventful year for the alternative asset industry—private equity (PE), venture capital (VC), real estate and hedge funds. According to data from VCCEdge, the financial research platform of VCCircle, PE deal value fell by 65% from $11.96 billion (Rs55,973 crore now) in 2008 to $4.2 billion in 2009 (till 23 December), while deal volume fell by 44% from 502 last year to 280. The year has catalysed some fundamental changes such as the emergence of LPs (limited partners, or investors in PE) as a powerful class. VCCircle highlights 10 dominant trends in 2009.
Building momentum: Wind power?production may see more deals in 2010. Adeel Halim/Bloomberg
1. LPS CALL THE SHOTS: Institutional investors are questioning the compensation of GPs (general partners, or managers of PE funds) and have proposed sweeping changes in the LP-GP relationship. “The balance of power has shifted to LPs,”says Rahim Penangwala, head of India (PE), at LGT Capital Partners AG. About 10 European and Asian development financial institutions, including CDC Group Plc, the UK government-backed fund of funds, have endorsed the Institutional Limited Partners Association (Ilpa) PE principles, which call for moderate management fees, accrual of transaction fees into the fund and equity participation by GPs in the fund.
2. PES CHASE LIQUIDITY: Institutional investors were busy liquidating their interests in PE funds to rebalance their assets and reduce their unfunded liabilities. So the secondary markets became active with participation from many LPs as these (secondary) positions were available at steep discounts. “The markets have moved from premium NAVs (net asset values) to discount NAVs. This is largely the function of the downward trends of underlying valuation. Even though the environment is benign, Indian PE, as a whole, hasn’t made money,” said P.V. Wang, partner, Adams Street Partners Llc, a participant in secondary transactions.
3. KEEPING THE HOUSE INORDER: PE/VC fund managers spent much of 2009 empowering their portfolio firms to beat the downturn instead of signing on new deals. “We’re finding it difficult to put money to work,” said a PE fund manager, requesting anonymity.
4. FOCUS ON RENEWABLEENERGY AND MICROFINANCE:With the government offering a generation-based incentive to wind power producers, this segment may see more action and deals. IDFC Private Equity, the largest investor in the renewable energy space, continued to strengthen its position by acquiring wind energy assets of BP Energy India Pvt. Ltd at an enterprise valuation of $95 million. Microfinance, the other fast-growing niche, recorded 16 deals worth $80 million as on 24 December, as per VCCEdge data.
5. RISE OF THE DOMESTIC LP CLASS: A dozen funds, mostly captive arms of institutions, such as ICICI Venture Funds Management Co. Ltd, Reliance Private EquityKotak Realty Fund and Tata Capital Ltd, among others, are raising domestic capital. ICICI Venture tapped the domestic market to raise $250 million and a follow-on $100 million as the first tranche of its $500-million fund. Reliance Equity Advisors, the PE arm of the Reliance-Anil Dhirubhai Ambani Group, is nearing the close of Rs1,500 crore from domestic institutions and high networth individuals. Domestic money is emerging as a sizeable pool of capital to power the Indian PE gravy train.
6. FOREIGN FUNDS SHUT SHOP, PE STALWARTS GO SOLO: Not being able to replicate the global model in India and victimized by the slowdown, four overseas PE firms and 25-30 hedge and sovereign funds shut their India operations this year. UK-based PE fund Englefield Capital , FirstRand Bank Ltd , Candover (a UK-based PE fund, unable to raise an Asia or/and India-focused fund) and Australian investment firm Babcock and Brown were among those that wound up. “A lot of hedge funds doing private equity shut shop in India. This has helped in making the valuations realistic,” said Vivek Sekhar, managing director, 2i Capital Capital (India) Pvt. Ltd, a New Delhi-based PE fund.
7. REALTY QIP PARTY:Aided by the investor-friendly qualified institutional placement (QIP) norms, real estate hosted a big QIP party in 2009. A host of realty firms such as Unitech Ltd, Indiabulls Real Estate Ltd, DLF Ltd, Parsvnath Developers Ltd and PuravankaraProjects Ltd raised money by selling securities to qualified institutional buyers.
8. PE BIGGIES INACTIVE: Apart from Blackstone Group Lp, which invested in Gateway Rail Freight and Allcargo Global Logistics Ltd, there were hardly any major investments from the bigger PE firms. Carlyle Group made one investment in Allsec Technologies Ltd and Warburg Pincus Llc invested in Synergy Media and Entertainment Ltd.
9. FUND-RAISING MORE CHALLENGING: As the markets turned, a lot of PE funds on the road to raising commitments from LPs had to defer their plans. Around 78 funds are out to raise money, says a report by Preqin, a London-based research body. Only those that returned capital to LPs in the past were able to raise money. India Value Fund Advisors ($725 million Fund IV) and IL&FS Investment Managers ($225 million for Tara Fund III) were among the few to finish big-ticket fund-raising.
10. SERIES B TURNS VCS’ SWEET SPOT:There is little action in early-stage investing with VCs putting their equity in firms with proof of concept, revenue and an initial round of funding. Series B, which refers to the second round of fund-raising for start-ups, turned a favoured investment stage with 24 deals in 2009 valued at $173 million against 15 deals in 2008 ($104 million), VCCEdge data shows.
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