Mumbai: Since the beginning of this year, India’s stock markets have shed some 42% in value and industrial production has decelerated. But, private equity (PE) and venture capital (VC) investments in the country have been resilient, surprising watchers of the risk capital business.

Bigger deals: Blue River Capital Management managing director Shujaat Khan (left) and KPMG chief executive officer Russell Parera.

Provisional data from research service Venture Intelligence shows that $9.7 billion, or Rs46,075 crore, has been invested in PE and VC-backed transactions in India between January and September, against $9.5 billion in the first three quarters in 2007. The data excludes real estate deals.

The 2008 investments are flat compared with the year-ago period, which saw a near-doubling of such deals from $4.9 billion in the first nine months of 2006, but is still healthy in an economy buffeted by high interest rates and slowing demand. “I am surprised to see the headline numbers so high, as anecdotal evidence suggests promoters still expect high valuations, and investors find it difficult to close deals," said Ashuthosh Gupta, vice-president, investment research, at Evalueserve, a Gurgaon-based research and analytics firm that also tracks private equity.

A growing number of complex-structured deals, transactions involving more than one PE or VC firm, larger deal sizes and more funds that invest in India have been buoying the amount of such funding, say experts who track the industry.

Traditional straightforward PE deals are increasingly being replaced by complex structures that, for instance, ensure a downside protection to investors or the ability to bail out if things turn bad. Such structures include what are called ratchets, put options and convertible instruments. “An increasing number of deals are getting done using these," says Shujaat Khan, managing director of Blue River Capital Management (India) Pvt. Ltd, which manages a $140 million fund that has invested in seven companies since 2006. He was speaking at a PE conference in Mumbai last week.

Russell Parera, chief executive of consulting firm KPMG India, says, “There is a wider use of structured equity these days." A favoured structure is a ratchet, which is an anti-dilution clause in the agreement that protects an investor from a reduction in percentage ownership in a company even if additional shares are issued by it to other investors.

A put option allows investors to sell stock back to the company at a preset price (or range) within a given time period. And convertible instruments allow investors to convert these into equity at a later date and at a preset price, once the investor feels more comfortable that the company is meeting growth projections.

Still, according to Vishal Gandhi of Mumbai law firm Gandhi and Associates, who says such structures were used in recent large deals, the question is whether such complex clauses can be enforced in India. “Many of them are untested and there aren’t too many precedents where they’ve been enforced," he says.

Another reason PE and VC activity is high is that many investors have been mitigating risk by bringing in co-investors into deals. “There are more and more transactions where there is one lead investor, who brings in more investors," said the head of a private equity firm who did not wish to be named. Nine of 21 deals in September had co-investors.

Deal sizes too are getting bigger. A report from Mumbai-based JM Financial Consultants Pvt. Ltd says that in 2007 and 2008 (until September), 74% and 80%, respectively, of the transactions involved capital in excess of $50 million, compared with 45% and 63% in 2005 and 2006.

Besides, there are several funds that have entered India in the last year. According to a late 2007 report from Evalueserve, there were 366 PE and VC firms operating in India and another 69 that had raised, or were in the process of raising, funds to invest in India. An update to this report is pending, but Evalueserve’s Gupta had his hunches. “The actual number of funds would be higher this year; my guess is it’s closer to 400," he said, adding that some of the older funds may not be that active.

For example, among the larger funds some, such as the Carlyle Group Llc., have not made a single investment in India this year and rival Citigroup Venture Capital International has concluded just two transactions. “When new funds get raised, they will pick up some of the slack that the older ones may have let go of," said Gupta.