PE/VC players deal a good hand for ’10

PE/VC players deal a good hand for ’10

New Delhi: After the drought of 2009, when the value of private equity (PE) transactions tumbled by 65%, investors are getting ready for a fertile deal-making year.

A survey of 32 venture capital (VC) and PE funds conducted by VCCircle shows that around 62% of investors expect to sew up more transactions in 2010 than they did last year, when deal-making appetite was hurt by the economic downturn.

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The response is encouraging, given the backdrop of last year, when PE deal value plunged from $11.96 billion (Rs55,614 crore now) in 2008 to $4.2 billion, according to data from VCCEdge, the online financial research platform of VCCircle. Similarly, the number of deals too, fell by 44%—from 502 in 2008 to 280 in 2009.

It appears that funds with dry powder (money ready for investing) will be itching to multiply their portfolio. This is a dramatic change in sentiment compared with the VCCircle Deal Outlook 2009, in which 54% of the respondents had predicted a slowdown in transactions.

The optimism stems from the fact that Indian companies, many of which had put their growth plans on hold last year, are now ready to expand. That process will prompt them to raise funds. “It’s a snowball effect when corporates feel that economy has improved and liquidity is coming back," Srinivas Chidambaram, managing director, Jacob Ballas Capital India Pvt. Ltd, said.

India’s estimated 8% gross domestic product growth, consumption patterns and strong fundamentals are further fortifying the investment thesis of the alternative asset class. Around 76% of these investors are “very excited" about the India growth story, while 21% are “somewhat excited".

But alongside the optimism lurk mild concerns of whether the growth story is all hype or for real. “The growth story is very much there, but one has to be cautious—the magnitude of the growth story has been mis-assessed several times before," said Alok Mittal, general partner at Canaan Partners.

While deal-making is what makes the headlines, the exit track record is the true litmus test for funds. Exits are among the top-of-the-mind concerns for VC/PE investors, for whom the economic downturn in 2009 has meant more delays in liquidity events (the act of cashing out through an initial public offering, or IPO, trade sale or secondary sale).

Several PE and VC funds lined up some exits in 2008 and 2009, but were not able to proceed because of a steep fall in valuations following the bankruptcy of Wall Street investment bank Lehman Brothers Holdings Inc. in September 2008 that caused credit markets to seize up.

Around 65% of deal makers say that the exit environment will improve in 2010, while 17% feel otherwise. Against the backdrop of a stock market rally and increasing valuations, investors are seeing this as a good time to cash out. In 2009, the Bombay Stock Exchange’s benchmark index, the Sensex, rose by 80%. Many might also be looking to bring in liquidity into their portfolio by way of a public issue. About 72% of investors say their typical holding period is more than four years, while the rest voted for two-four years.

At least 50% of the respondents said that a strategic sale will be a likely exit route, while 60% batted for IPOs. Around 25% feel that secondaries (when original PE investors sell to another investor) may also be an exit option. This comes as a surprise because only 7% of respondents in VCCircle’s Deal Outlook 2009 voted for exits via IPOs, while 73% were in favour of strategic sales.

Investors seem to be split on valuations. While 41% of the respondents expect realistic valuations, a similar number (44%) feel that companies will be overvalued in 2010. Unrealistic valuations may play spoilsport in deal-making as many investors say that Indian companies are already expensive. Market volatility may lead to further uncertainty over valuations and could delay deal closures.

Investment bankers, who were part of the survey, say that mergers and acquisitions in 2010 could be dominated by inbound deals with multinationals looking to buy into the India growth story.

To sum up, VCCircle Deal Outlook 2010 shows that investors are positive and bullish on three counts: deal flow, the India growth investment thesis and a favourable exit environment.

Shrija Agrawal and Sarimul Islam Choudhury contributed to this story.

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