PE deal value to grow at modest pace in 2012

PE deal value to grow at modest pace in 2012

Deepti Chaudhary
Updated15 May 2012, 10:58 PM IST
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Mumbai: Private equity (PE) and venture capital (VC) investors expect the value of transactions in 2012 to grow as much as 25% from last year, with limited partner investors becoming more selective about where they park their money in a bid to ensure capital protection, better returns and more liquidity.

Deal value, too, surged about 55% in 2011.

In 2012, however, the amount of uninvested capital committed to India has dropped by about 15% to nearly $17 billion compared with $20 billion available at the start of 2011.

These are some of the key findings of Bain and Co.’s India Private Equity Report 2012, produced in collaboration with the Indian Private Equity and Venture Capital Association (IVCA). The report is based on a survey of more than 65 PE and VC investors. According to the survey, about half of the investors surveyed saw moderate growth of 10-25% in the PE industry while a third felt it would remain steady at 2011 levels.

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A new report from Bain and Co. says private equity and venture capital investors expect only moderate deal value growth this year. Mint’s Deepti Chaudhary explains.

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“Growth will be somewhat constrained by challenges in exiting current investments and uncertainties around regulations,” said Arpan Sheth, who leads the PE practice for Bain and Co. in India, and is the main author of the report.

While 2011 saw a sharp 30% drop in the number of exits over 2010, about 60% of the survey’s respondents agree that the number of exits will rise moderately in 2012 as investors seek returns from pre-2007 transactions. The exit market in India has been lacklustre for reasons beyond depressed stock markets—many of the deals struck between 2006 and 2008 carry premium valuations that make attractive exit internal rate of returns difficult to achieve.

Exits are extremely important for PE funds as returns on investments set the pace for the future of that industry, often dictating how limited partners will look at the potential of the country in the longer term.

A large portion of the funds that were invested between 2003 and 2007 are still being held in PE funds’ portfolios. According to Bain research, 71% of the capital deployed on the largest deals in India during those years is yet to be returned to limited partners.

“Markets were looking quite buoyant in the first two months of this year, but no longer. Things have changed and there are few IPO opportunities currently,” said Sheth on the phone, adding that the pressure to exit would be high particularly for 2006 to 2008 investments. “Given the challenges of public markets, it is reasonable to expect a higher number of secondary and strategic sales.”

“There are several 2004-07 vintage investments, where PEs would be under pressure to exit. That may translate into more reasonable valuations, which can then create its own buying interest, even in the current economic environment,” said Vivek Gupta, partner, M&A practice, BMR Advisors, on the phone.

Buyouts are also on a rise in the country, albeit slowly. There were 25 buyouts in 2011, compared with 10 in the year earlier. These deals will rise further this year. “It (control deals) will primarily be for assets that do not fit a group’s or company’s portfolio anymore. These control deal situations would be sector agnostic and vary on a situation-by-situation basis. It will be driven by companies and promoters and their circumstances,” said Sheth.

Furthermore, a few PE funds are preparing themselves for this future, moving to a strategy of taking one or two deals in which they have full control, rather than spreading themselves thin by holding minority stakes in multiple companies.

Investors view consumer products, healthcare, and banking and financial services as the most-attractive sectors for future PE investments. Along with this, the interest in e-commerce, for which deals in 2011 nearly tripled compared with 2010, is set to continue. In 2011, investors signed 86 deals in the space—about 46% more than the total transactions signed in the previous two years combined.

“Growth of e-commerce in India will be fuelled by multiple factors, including increase in broadband access, increasing penetration of smartphones, growth in enabling services, and greater consumer adoption of the medium,” Sheth said.

The current year could also be dominated by larger deals, or those above $50 million. Around 50% of respondents to the survey expect to invest between $50 million and $200 million in India, while only 36% plan to invest less than $50 million. The average investment size for the top 25 deals was $236 million, nearly equal to that in 2007.

The cumulative investment in the top 25 deals in 2011 was $5.9 billion, about 34% more than the previous year.

“Because of the lack of public offerings, a lot many large deals are coming to PE firms now. Global PE funds tend to like the investment spot of over $50 million,” said Vikram Utamsingh, partner, transactions and restructuring and private equity advisory, KPMG, on the phone.

Last year also saw an increase in early stage deals and 28% of those were struck with companies founded within the last three years. Smaller transactions proliferated mostly on the back of growing interest in e-commerce. The interest in e-commerce will continue in 2012 as well, according to Sheth, who added that healthcare delivery could also become attractive for early state investments.

Meanwhile, new funds are getting active in the Indian PE market.

Last year, the number of ‘active’ funds (those that did at least one deal in the year), increased from 202 to 238. Nearly half of those, 113, had not done a deal in the previous year, suggesting that new funds are getting active in the Indian PE market, the report said. Of the funds that were active in 2010, about 60% returned to the market in 2011.

Consolidation will happen among general partners (GPs), said Utamsingh. According to him, experienced professionals from different investment firms may look at joining hands to raise a new fund. The consolidation will not include funds taking over each other, he said.

“We will see a lot of experienced people, those who have either worked in global PE funds or were running their own investment firms, coming together to start something new. Their track record, experience will add to their credibility,” said Utamsingh.

According to the report, limited partners are getting worried about uncertainties in India’s tax regime, which directly affects the net capital gains from their committed investments. The recent Vodafone tax dispute has raised fresh concerns around how controlling interests in Indian companies will be taxed when investors exit.

“For PEs to realize their full potential to support India’s growth story, important regulatory hurdles like uncertainties in India’s tax regime and limited investment opportunities for foreign investors in several regulated sectors such as multi-brand retail need to be addressed,” IVCA president Mahendra Swarup said in the report. Some limited partners are now visiting the country to develop a first-hand understanding of India and its potential. “Our limited partners have become more hands-on. Though we retain the flexibility in investments, they are discussing deal themes a lot more and are constantly pushing us for a more rigorous diligence,” said one general partner, in the report, who was not identified.

deepti.c@livemint.com

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