2009 has been a year of introspection for most private equity players in the country.
The financial debacle in 2007-08 followed by the fight for survival by its investee companies in 2008-09 has added a crucial chapter in the evolution of the PE industry in India.
And with the economy improving in 2009-10, the PE fraternity is reinventing itself by thinking out of the box when it comes to making investments/deals.
The investment banking fraternity feels that PE in India is in transition phase and will find its own path.
“This is because the PE industry is facing intense competition from the public markets — the kind they have never faced before,” feels Gaurav Deepak, managing director, Avendus Capital Pvt Ltd.
If one looks at the entire private equity/venture capital space, the investments can be categorised across brackets such as up to $10 million, $10-30 million, $30-40 million and $40 million onwards. It is the over $40 million bracket that is witnessing a tough competition from the public markets.
Most of the IPOs (initial public offerings) in the recent past have been in the Rs 350-500 crore range. These companies could have easily done a PE placement but instead chose to go public. Larger deals are now getting limited to sectors such as power and infrastructure and any deals beyond that spectrum will necessarily have to be specialised deals.
“I’d certainly buy that analysis,” said Darius Pandole, partner, New Silk Route Advisors Pvt Ltd.
“In fact, the phenomenon is also quite evident in the qualified institutional placement offers by listed companies where the absorption has been so quick,” he said.
The reasons cited include the fact that public markets do not demand rights nor do they ask for diligence, which has led to a substantial increase in demand and depth for public market funds.
Also, the valuations and expected returns are significantly lower than what a private equity firm would ask for.
This has put funds such as Bain Capital, Warburg Pincus, Carlyle, Apax and KKR (operating in the over $40 million bracket) in a tight situation.
Investment advisory firms feel this set of PE players will now have to look at deals in a very tactful manner and start thinking about how to do transactions differently.
An interesting example of looking at deals differently is the recent Kotak PE’s investment along with M&Mfor acquiring majority stakes in two Australia-based aerospace companies.
“I think there are more such deals in the making and we should see more such examples in the coming year,” feels Deepak. A study by Grant Thorn ton India puts the total number of PE and QIP deals announced during 2009 at 221, with a value of $11.17 billion compared with 312 deals at of $10.59 billion in 2008, and 405 deals with a value of $19.03 billion in 2007.
The average PE ticket size increased from $33.93 million in 2008 to $50.55 million in 2009. Top 8 PE deals accounted for more than 41% of the total PE deal value in 2009. Top 8 deals accounted for 28% of total deals in 2008.
The highest proportion of PE/QIP investment (in value terms) were made in the real estate & infrastructure and banking & financial sectors with an investment of $4.6 billion and $1.3 billion, respectively, together accounting for over 53% of PE/QIP investment made in India during 2009.
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