Bangalore: A downturn in credit markets and high interest rates coupled with a meltdown in global equity markets normally presents a significant investment opportunity for private equity, or PE, and venture capital, or VC, firms, as entrepreneurs have almost no other avenues to sustain their businesses.
But, latest numbers in the PE and VC business in India seem to be bucking the trend. The value of such deals has fallen 28% year-on-year in the September quarter as the size of transactions have shrunk, according to data from Venture Intelligence.
The deal-tracking firm estimates PE and VC firms struck 116 deals worth $3 billion (Rs14,790 crore now) between July and September, as against 115 deals worth $4.2 billion in the same period of 2007, with deals exceeding $100 million dropping by a third.
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In the first nine months of 2008, as Mint had reported on 7 October quoting Venture Intelligence estimates, such investments stood at 330 deals worth $9.7 billion, against $9.5 billion invested across 296 deals in the year-ago months.
While investors say the current market situation has enough opportunities, striking deals is not coming easily as entrepreneurs are still trying to hold back, awaiting the return of valuations of last year.
“The number of entrepreneurs approaching us has increased by as much as 25% over the last one month. With credit markets being frozen, I think, it is pragmatic for companies to come to private equity players,” said Vishal Sharma, managing director, Tuscan Ventures, an investment firm focused on logistics business.
Entrepreneurs have taken a wait-and-watch approach, according to Nitin Deshmukh, head, Kotak Private Equity Group. With valuations already down 20%-40% (in tandem with public equity markets that have shed some 50% value since January), there is a lack of enthusiasm to close deals as founders of companies seeking funds are still hopeful of a bounce back in the markets.
Still, “the number of deals may take time to pick up,” said Nainesh Jaisingh, managing director, Standard Chartered Private Equity Advisory (India) Ltd, despite what he called a “recalibration” of entrepreneur expectations on valuations. The quality of deals will be better in the near future, though the number of deals may come down, says Jaisingh.
“We have seen deals falling apart on a difference of 2% to 3% in valuation expectations,” said a Bangalore investment banker, requesting anonymity.
He cited the example of a cross-city Internet firm that was looking for a valuation of $20 million earlier this year, an expectation that has been reduced by one-quarter in a proposed deal to hawk a minority stake. An overseas fund is instead asking for a valuation of $10-12 million.
“The reluctance of entrepreneurs will become more visible over the next one month,” said C. Venkat Subramanyam, director, Veda Corporate Advisors Pvt. Ltd, an investment bank from Chennai.
Notwithstanding these blips, deals may bounce back in businesses catering to strong local demand such as energy, education and health care.
“Chances are that real estate deals will slow down after investors burnt their hands in this sector. Investors may also like to go a bit cautious on banking and BFSI (banking, financial services and insurance),” said Rahul Bhasin, managing partner, Baring Private Equity Partners India Ltd.
This rebound, however, hinges on which way the bearish public equity markets will swing. The optimistic predictions could change if market conditions do not improve in the next eight or nine months.
“There could be fall of 30%-50% in the number of deals if the market falls further,” cautions Kotak PE’s Deshmukh.
Graphics by Sandeep Bhatnagar / Mint