Mumbai: Private equity (PE) investors remain bullish on India despite the slowdown in economic growth, with nearly 80% of them expecting at least a 10% increase in deal value over the three years starting 2015, according to Bain and Co.’s India Private Equity Report 2014, to be released on Thursday.

About one-fifth of the investors surveyed for the report forecast growth of at least 25%.

The report was based on a survey of 53 general partners (GPs, or fund managers). Their optimism follows a 16% increase in deal value to $11.8 billion in 2013 despite significant economic challenges including a large fiscal deficit, persistently high inflation, currency depreciation and pessimism among companies and consumers.

The Indian economy grew by 4.5% in fiscal 2013, the slowest pace in a decade. Yet, the financial services, insurance, real estate and business services sectors, as well as community, social and personal services, grew at rates in excess of 6%, Bain and Co. said in its report—an affirmation of the domestic consumption theme that PE firms are banking on.

There continues to be strong interest in the PE community in consumer-driven investment themes—consumer products, healthcare, financial services, said Arpan Sheth, partner, Bain and Co., who also leads the firm’s private equity practice in India and is the main author of the report.

“Given the 5-7 year investment horizons of PE, there will be a strong interest in finding companies that have the brand, product and/or distribution assets to meet consumer demands in these sectors, where generally there is significant headroom for penetration growth left," he said.

PE investors, however, are less optimistic about 2014.

About 60% of the GPs surveyed for the Bain and Co. report either expect deal values to remain unchanged or decline in 2014, with about 35% expecting 10-25% growth and less than 5% of the GPs seeing expansion in deal value beyond 25%.

Funds are struggling to raise capital and limited partners (or LPs, who invest in the funds) have increased scrutiny on portfolio performance.

Sanjeev Krishnan, executive director of PricewaterhouseCoopers, concedes there isn’t enough capital in India to keep PE investments going in the long run. He added that key sectors such as power and infrastructure are starved for capital. “How many funds will have the appetite for such sectors is still a question mark. Sovereign wealth funds are providing a ray of hope but a vacuum exists," Krishnan said.

Bain and Co. expects PE funds will spend more time with their portfolio companies this year, preparing them for exits and creating a good track record to differentiate themselves with promoters and LPs alike.

Madhur Singhal, principal, Bain and Co., and a co-author of the report, said the importance of PE capital has increased.

PEs accounted for 54% of the overall foreign direct investment (FDI) inflow into India in 2013, against 45% in the previous year. “PE will play a more important role going forward as the source of funds that fosters entrepreneurship, shares the business risk and commits to enterprises irrespective of interest rates or capital market performance,"Singhal said.

The number of deals in 2013 increased to 696 from 551 in the previous year, with information technology (IT), IT-enabled services and healthcare continuing to be favoured sectors. Banking, financial services and insurance (BFSI) and media and entertainment also saw strong growth in both deal volume and value last year.

The Bain and Co. report, prepared in conjunction with the Indian Private Equity and Venture Capital Association, said that despite the rocky economic conditions and the relative shortage of quality deals, the number of PE and VC funds investing in India continues to increase. Nearly 310 funds engaged in deals in 2013, of which only 150 had invested in 2012.

Limited partners, though, are cautious about India, which has dropped in terms of attractiveness as other investment opportunities have come up in sub-Saharan Africa and Latin America (excluding Brazil), Bain said.

In some cases, LPs are looking for higher involvement in deal-making. India-focussed provisions for PE investment, excluding real estate and infrastructure, dropped 40%. This contributed to dry powder, or investible funds, shrinking to $8 billion at the start of this year from $9 billion in 2012.

Most PE funds draw on their regional or global capital pools to invest in India and those pools continue to grow, said Sheth, the main author of the Bain and Co. report. “So, we believe that there is enough dry powder waiting to be deployed in the Indian market for some time to come. There will not be a dearth of capital for some time in PE for India—the constraint is more deals driven than capital driven," he said.

Another key finding of the report was the nearly 17% increase in average deal size to $41 million in 2013 over 2012; over 50% of the GPs expect deal sizes to increase by 10% or more in the next 2-3 years.

Bain said the total number of exits in 2013 surged by 43% to 164 from 115 in 2012, though the value remained unchanged at $6.8 billion. More than half of the capital invested in India since 2005 continues to be in PE fund portfolios. “We expect a high number of secondaries and strategic exits in the market as the pressure to exit investments of the 2007-08 vintage is building up," said Singhal, the co-author.