Private equity investments on the rise, 93 deals in Oct-Dec

Private equity investments on the rise, 93 deals in Oct-Dec

New Delhi: Private equity (PE) and venture capital (VC) investors notched up a deal a day in the three months ended December, suggesting a rise in transactions that’s expected to spill over into the first half of 2010.

At 93 deals in the last quarter of 2009, investors fared much better than in the preceding quarters, which recorded about 60 transactions each. PE and VC deals slumped 60% to close 2009 at $4.4 billion (Rs19,976 crore), from $11.9 billion in 2008, as the alternative assets industry turned out to be one of big casualties of the global recession.

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Such investments had been declining since the demise of Wall Street investment bank Lehman Brothers Holdings Inc. in September 2008 seized up global credit markets. “The trend has changed since June onwards and there is a sustained revival. From now onwards, in the first six months of 2010, we will see an increase in PE investments," said K. Srinivas, managing partner at BTS Investment Advisors Ltd.

In line with the buoyant numbers in the last quarter, around 62% of VC and PE investors who took part in the VCCircle Deal Outlook 2010 survey said they expected to ink more deals in 2010. To be sure, these investments are nowhere near the peak they touched in the first quarter of 2008, when 195 deals were clinched.

Still, the last three quarters of 2009 recorded a deal value of around $1 billion each. Compare this with the first quarter of 2009, when the total value of deals shrank to $668 million, the lowest in any three months since the fourth quarter of 2005, according to data from VCCEdge, the financial research platform of VCCircle.

With the markets hitting bottom, differences between promoters and PE investors over valuations widened, leading to a decline in deal-making. “With the slowdown in business since 2008, the growth story being projected by entrepreneurs was hard for PE players to believe," said Srinivas.

Mergers and acquisitions (M&As) also slumped in 2009. M&A deal value dropped by half to $12.5 billion in 2009 from 2008. Unless Indian industry sees a significant pick-up in large transactions, it is unlikely that M&A numbers would touch the level of 2007, when mega deals pushed up annual M&A value to more than $43 billion. According to VCCEdge data, inbound deals and domestic deals (between two Indian firms) did not see a significant drop in M&A deal activity at 273 transactions in 2009, compared with 276 in 2008.

But outbound deal volumes plunged in 2009 from the peak levels of 2008 when as many as 170 overseas acquisitions were made. Although the value of both outbound as well as domestic deals declined in 2009, the drop in outbound transactions is more prominent.

Against a 30% decline in the value of Indian deals to $10.14 billion, outbound deals dived by around 80% to just $1.84 billion last year.

PE investments reached a peak in 2007 with 358 deals, against 349 in 2008; the number fell steeply to 181 in 2009. While VC firms accelerated in 2008 despite the market crash, VC deals rose almost 30% over 2007 to 134 in 2008 even as funding declined marginally. The number, however, came down to 91 last year. VC deal?value declined 52% to $314 million in 2009.

Will 2010 see the industry covering lost ground?

The fundamentals of the Indian economy are in place, including overall economic growth, efficient capital models and entrepreneurs, said Kanwaljit Singh, managing director of Helion Venture Partners. These factors could make 2010 a busy year for deal makers.

Content from VC Circle

Graphics byYogesh Kumar / Mint