Every year, some sectors catch the fancy of venture capitalists and private equity investors. That explains why only a handful of sectors receive a large chunk of PE/VC allocations. The trigger point could be that these sectors have reached an inflection point or that some feisty entrepreneurs have demonstrated scalable and promising business models. A combination of these factors typically strengthens the investment thesis for private equity investors. VCCircle brings to you five such hot sectors that investors will place their bets on in 2010.
We are not talking about traditional pharma manufacturing. That is an old story. The new-age healthcare delivery businesses is about hospitals, specialised clinical centres, diagnostic chains and medical device companies. Now, these businesses have largely played in commoditised and unorganized part of the value chain. Barring an Apollo Hospital and lately Fortis Healthcare and Max Healthcare, there are no nationally-known private hospital enterprises worth talking about. That is going to change with PE investors backing this sector in a big way.
Now hospital companies in tier II cities or diagnostic chains which have plans to build a national footprint are being courted by investors. Trichy’s Sri Kavery Medical Care and Secunderabad-based Pushpagiri Health Care Hospitals are some non-metro healthcare businesses that have received funding. Investors are on the lookout for hospital chains and diagnostic labs as demand for quality healthcare services is taking away a large share of the wallet spend. This sector claimed private money inflow of $263 million across 16 deals in 2009.
A vast population of rural and urban India is under-banked. They do not have access to basic banking facilities nor do they have access to cheap credit for income generating activities. The result has been an explosion of microfinance institutions (MFIs) who are looking to serve the unbanked poor. Besides the microfinance focused funding institutions, the traditional VC and PE firms are also looking to fund MFIs in India. Hyderabad-based SKS Microfinance led the way by securing funding from firms like Sequoia Capital India and Sandstone Capital. There were 18 MFI deals worth $95 million in India in 2009, signifying the high level of funding activity in the space. Ask any venture capital firm, all of them are looking at financial inclusion as an attractive opportunity. So, potential targets for investments could be a pureplay MFI or service providers in the financial inclusion space such as FINO, a technology company which helps bank reach out to the poor. The attractiveness of this sector also makes it more prone to rising valuations, which could deter some investors.
There are interesting niches in education where private money is keen to park itself. One is the test prep segment where most of the big boys have been taken. In 2009, three test prep companies raked in about $36 million in funding. Ten years ago, they were hardly investment worthy as they were largely one-man shops centred around a particular locality. Today, they make serious money with some players making as high as Rs 150 crore in revenues. Investors are looking at these test prep players to diversify into formal education such as schools, colleges and even universities. Delhi-based FIITJEE raised Rs 100 crore from Matrix Partners India mainly to expand into the formal education segment. So is Kota-based Career Point. Vocational education, skills upgradation and finishing schools are niches which have already attracted funding. VC/PE players may now chase formal education in a big way. Besides, technology companies serving education sector are also a big hit and this trend will continue. In 2009, education sector managed to garner $118 million from VC/PE investments across nine deals.
This is a priority area with the government announcing generation-based incentive for wind and solar energy projects. Now, grid interactive solar energy projects would get a preferential tariff for 25 years, besides zero excise duty for equipment for these projects. As for wind, the government would pay 50 paise per unit of electricity fed into the grid from wind power projects subject to a maximum of Rs 62 lakh per MW. All these efforts are intended to make the sector attractive for investors. Besides solar and wind, small hydro power projects are another area investors are looking at closely. The Ministry of New and Renewable Energy has created a database of potential sites of small hydro aiming to generate about 7000 MW by the end of 12th Plan. It’s counting on private sector to boost energy from small hydro. And of course, rapid urbanization is triggering need for efficient solutions in water treatment and waste recycling. This sector raised $216 million in 12 deals from VC/PE firms in 2009.
Every investor is looking to ride on the domestic consumption as opposed to exports. India is one of the emerging markets where any segment of the consumption basket is under-served and under-exploited in a highly disproportionate way compared to the world average. The demand for fast moving consumer goods such as personal care products, soaps and detergents, and food will continue to grow as the Indian economic growth is expected to grow at a higher clip compared to most other countries. Indians are still new to organized consumer services like beauty salons, centralized cab services, restaurant chains and entertainment businesses like multiplex chains and amusement parks. With changing demographics, the demand for such services will only grow. So a majority of private equity investors are betting on consumption-focused business opportunities. The India consumption story managed to attract $189 million in 17 VC/PE deals in 2009.