Mumbai: India has lost its standing as the fastest-growing private equity (PE) market in Asia, and investors expect a moderate 10-25% rise in deals in 2013, according to Bain and Co.’s India Private Equity Report 2013.

The value of venture capital or VC/PE deals in India fell 30% to $10.2 billion in 2012 from $14.8 billion in 2011 as promoters were unwilling to divest, faced with what they considered to be low valuations, said the report, which is to be released on Tuesday.

The Bain report, produced in collaboration with the Indian Private Equity and Venture Capital Association (IVCA), however, noted that the number of deals increased from 531 to 551 in the same period, highlighting a fall in average deal size.

Raising new capital became a challenge for Indian promoters with India receiving only $3.5 billion of the $320 billion funding raised globally in 2012, according to UK research firm Preqin, whereas the sum mandated for India in 2011 was $7 billion.

When it comes to dry powder, PE funds entered 2013 with $11 billion for investment—nearly one-third less than the $17 billion that remained in January 2012, according to Preqin.

Dry powder refers to the capital available for investors to deploy.

While exits may be on the rise, a significant proportion of the funds invested between 2003 and 2007 are still being held.

As of 2013, India has returned $30 billion of the nearly $85 billion total capital invested since 2000.

By comparison, China has returned $375 billion out of the $561 billion invested since 2002, a significantly higher proportion, the Bain report revealed.

A vast majority of firms surveyed for the report believe that exits will increase in 2013, with a fifth expecting this increase to be over 25%. More than 40% of respondents expect exit volumes to rise significantly in the next three years, looking to healthy signs such as the increasing number of secondary transactions.

In 2013, secondary and strategic sales will continue to be the predominant modes of exit. The GPs surveyed for the report expect a threefold rise in the number of exits through initial public offers (IPOs) between now and 2016.

“Some exits have happened and clearly many more exits need to take place over the coming year, given the torrent of PE investments in India (and globally) from 2005 to 2007. Those investments are now at the tail end of a typical PE holding period, and in some cases beyond them," said Sheth. “Due to this, there could be some situations where investors are compelled to exit because of timing issues or fund cycles."

The study also found that deal activity will see moderate growth in 2013 throughout the industry. Around 45% expect to see moderate growth throughout the industry in the next year while 51% of investors plan to invest between $50 million and $200 million, whereas for the medium term (three to five years), this percentage leaps to 95%.

“The decline in the quantum of available dry powder will lead to lesser competition for deals and hopefully a new cycle of more rational investing for private equity in India. As a consequence, the investment vintages of 2013-14 are likely to yield better returns than the vintages of 2006-08," said Darius Pandole, partner, New Silk Route Advisors Pvt. Ltd.

Early-stage growth and venture capital have played a critical role in deal-making in 2012 with the number of early-stage deals under $10 million almost doubling to 244 in 2012. Also, the top 25 deals added up to just $4.3 billion, compared with $5.9 billion in 2011. The average deal size in the top 25 dropped by almost a quarter to $175 million per transaction last year, the report said.

Early stage now needs a lot more capital than a decade ago, said Bala Deshpande, senior managing director, New Enterprise Associates (India) Pvt. Ltd. “It’s no longer $2-3 million, and the average deal size now is $6-8 million," she said.

Deshpande said as VCs are participating in follow-on rounds as well and they often end up concluding deals of $12-15 million.

Healthcare emerged as a sector of growth in a contracting PE industry in 2012 and this is expected to continue to grow this year, the Bain report noted. Investments in healthcare almost tripled over the past year, rising from $0.46 billion in 2011 to around $1.3 billion in 2012. Deal volume also rose 50%, with 45 deals in the sector in 2012.

The overall Indian healthcare market is around $65 billion and has grown 11% in the past five years, the report said. “India’s growing population, increased incidence of diseases, greater affordability, expanding insurance coverage and supportive government schemes are the key drivers of high double-digit growth expectations of the PE industry," it said.

Experts say sentiment regarding India hasn’t been too positive among PE firms in the last few years but the industry will remain committed to the country in the long term.

“Though interest has waned, LPs, like other investors, are fundamentally attracted to the large consumer demand story in India and, over time, there will be capital for investing," said Sheth of Bain & Co.