Mumbai: Private equity and venture capital firms went about their work at a seemingly healthy clip in the first quarter of the current year—investing at least $643 million (around Rs3,200 crore) in 36 companies—despite the gloomy outlook for the economy.
However, this number, collated from data provided by Thomson Reuters, masks the fact that two large deals skew the picture.
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The largest reported deal was by Dubai-based Millennium Private Equity and Bahrain Telecommunications Co. BSC, which in a consortia invested $225 million in the newly formed Indian telecom venture, S Tel Communication Ltd. In this instance, Millennium Private Equity’s share of the deal is not clear.
The other big deal was the European private equity group 3i Group Plc.’s investment in Andhra Pradesh’s Krishnapatnam Port Co. Ltd, which was worth $161 million. The deal has been in the works since late last year, but was awaiting approval from the cabinet committee on economic affairs because of its size.
If these two investments are kept out, then the total risk capital invested comes to $257 million, far below the $900 million and the $475 million invested in the first quarters of 2007 and 2008.
A majority of the past quarter’s private equity deals were also less than $20 million each.
Besides valuation issues—linked to public market valuations that have halved since January 2008—private equity fund managers, also called general partners (GPs), have been hindered by their investors asking tough questions on earlier investment calls gone wrong. They are also being instructed to be prudent in putting more of the investors’ money to work.
Further, some of these investors, also called limited partners (LPs), have been going back on capital commitments made to their GPs. LPs typically are pension funds, endowments, hedge funds, so-called fund-of-funds and investment offices of wealthy families. LPs have been grappling with their own set of problems, what with every asset class in their portfolios—be it equity, fixed income or anything in between—having come in for severe hammering over the last year.
“Right now the question is liquidity, and people are tending to focus more on (investment) strategies that provide you pretty good liquidity. But those are trends that are more tactical and cyclical and as markets start to improve in the US, people will be looking a little bit more at private equity,” said Robert L. Worthington, president of Hatteras, a North Carolina, US-based provider of alternative investment solutions to financial advisers, on the sidelines of a conference organized by Capvent AG in Goa earlier this month.
Capvent is a private equity fund-of-funds, which counts other funds among its investors, and Hatteras is raising a dedicated fund focused on the private equity asset class, which it will invest through Capvent.
Besides, unlike earlier, private equity assets have also started getting marked down as opposed to being held at cost, to reflect market realities. “2006 and 2007 will go down as one of the worst possible vintages,” Philip Bilden, managing director of HarbourVest Partners (Asia) Ltd, a private equity fund-of-funds, had said at an industry event in February.
A clear indicator of how past private equity investments have turned sour can be gauged from data on private investments in public equity (PIPEs). A report from Delhi-based brokerage SMC Capital Ltd shows that $5.29 billion worth of PIPE deals done in 2007 were down in value to $2.86 billion at the end of last month. Similarly, the $1.67 billion invested by private equity investors in listed enterprises in 2008, was down to $810 million by the end of the same month.
With such glaring gaps in their portfolios, it comes as no surprise that GPs are holding back on investments in an effort to save face.
That said, India probably still figures high on the list of those LPs who allocate capital to private equity. According to a survey published by Washington-headquartered Emerging Market Private Equity Association and Coller Capital earlier this month, at least three-quarters of the 156 respondents plan to commit additional capital to emerging market managers and geographies over the next five years, and about half of the respondents (49%) in the next two years.
Among the emerging market destinations over the next 12 months, India ranked third, behind China and Brazil, the survey showed. “There are certainly risks there, but we think India is going to grow at a faster pace than most of the rest of the world. And that’s a good place to be if you are an investor and you do the right due diligence. We would expect that in 10-15 years, India will only grow and become a larger component of the global economy,” said Worthington of Hatteras.
Graphics by Sandeep Bhatnagar / Mint