PE-backed firms steal the thunder

MUMBAI: It doesn’t come as much of a surprise that private equity/venture capital investments into Indian companies recorded a three-fold jump in 2006 compared with a year ago.

It follows from the fact that private equity (PE)-backed firms have grown faster than peers which have not had any backing from these great infusers of capital.

Between 2000 and 2005, PE-backed companies grew their sales at 22.9% compared with the entire universe of non-private equity backed companies that managed to grow sales only by 10%, according to a report by Venture Intelligence, a provider of information and networking services to the private equity and venture capital ecosystem in India.

The growth rate for companies that constitute the Nifty (both PE and non-PE backed) was just 15.8%.

But if one were to argue that Nifty companies (large cap companies) are not the types that get venture funding, the study also shows that the CNX Midcap companies managed to grow their sales at only 13% over the period.

For purposes of comparison, the study also dug into data on companies that constitute the CNX IT and CNX Pharma index, since these are sectors that receive maximum PE funding.

It turned out that CNX IT constituents grew their sales higher than PE-backed firms, at 29%, though the CNX Pharma companies (which grew sales at 19%) could not beat the PE-backed firms.

To ensure authenticity of data, all the 75 PE-backed companies analysed by Venture Intelligence are now publicly listed companies. They were chosen from the entire universe of listed companies on the basis of having received PE-funding at any stage in their lifecycles.

On exports too, PE-backed companies seemed to fair better. Over the same five-year period, PE-backed companies were also able to grow their exports at 33% compared with the entire universe of non-PE backed companies which grew it at 22%, Nifty companies (grew at 32%) and CNX Midcap companies (grew at 28%). However, against the CNX IT and CNX Pharma indices, the PE-backed companies lost out. These two groups grew their exports at 40% and 34% respectively.

The average wage growth in PE-backed companies was also higher, at 32%, compared with non-PE companies (6%) and companies in the Nifty (16%). Here again, companies in the CNX IT index managed to overshadow the PE-backed companies, reporting wage increases of 50%, though CNX Pharma and Nifty Midcap companies fell short, growing wages by just 24% and 8% respectively.

The study also shows that 50% of the funds raised from PE/VC firms are used for capital expenditure. While 29% is used for research and development, the remaining 21% is spent on marketing.

For the record, PE investments into India stood at $7.46 billion in 2006 compared with $2.2 billion in 2005.

“Another $8-10 billion is expected to come in this year,” says Raja Kumar, managing director and chief executive officer of UTI Venture Funds, which manages in excess of $200 million currently.