Improvements in corporate governance structures and access to capital in the growth phase have been identified as the areas of significant impact made by the contribution of private equity investments in Indian companies.
A KPMG India Survey of Portfolio Companies 2010 says, investee companies believe that PE is an excellent source of capital to build new and innovative business models and also the best long term source of funding for growing businesses.
PE funding not only helps raise the profile of the investee company but also strengthens the credibility of the promoters. This is particularly useful at the time of making a public issue, the survey said. PE investments transformed the company and the business environment as well.
One of the less-understood benefits of PE investment is enhancement of reputation. The investee companies are usually too immature to access equity capital from capital markets and too small to tap debt capital. PE enables a financial base which allows access to bank finance. And, PE capital from a reputable firm is worth much more than the money. It adds value such as better terms of finance, quality of recruitment, client and vendor relationships and perceptions of better competitiveness, the investee companies believe.
Besides, the profile of investee companies is typically small and medium enterprises (SMEs) who need advice on how to build an organization structure, develop a line of management distinct from ownership, improve corporate governance and scale up.
Vikram Utamsingh, Head of Private Equity and Markets, KPMG India said, “Development of infrastructure to support the expected 7-8% GDP growth is important and a significant portion of the capital required to fund this growth could come from PE. Hence, PE is being increasingly recognised as an important asset class in India. Besides, 2010 is witnessing a resurgence of PE funding following decreased deal activity in 2008 and 2009.”
According to the recent CII-KPMG report on PE investments, micro, small and medium enterprise (MSMEs) are expected to play a critical role in India’s growth story and will continue to be a significant target for VC/PE investment going forward. MSMEs account for a significant proportion of listed companies. Nearly 40% listed companies have a market capitalisation of less than Rs 125 crore (with the Sensex at more than 17,000). Also about 80% of all Bombay Stock Exchange (BSE) listed companies have a turnover of less than Rs 100 crore. More than 80% CII members are from the MSME sector.
A significant 70% of VC/PE investments in 2008 have been in MSME companies with turnover less than Rs 500 crore. Thus the average VC/PE investment deal size over the last three years was Rs 70 crore (excluding real estate /infrastructure) as against an average deal size of Rs 170 crore across all deals, the report said.
Gopal Srinivasan, Chairman, CII National Committee on PE and VC Chairman and MD, TVS Capital Funds Ltd. said, “The key difference between PE and other forms of capital is the strong operational discipline and management bandwidth brought in, post investment, to the investee companies. Studies have shown that PE companies in India typically outperform the mean of the Sensex on parameters like profitability, employment generation and innovation by 15-25%.”
India has a very vibrant VC/PE industry with $32.5 billion invested across more than 1,500 deals from January 2006 till date. It is estimated that there are over 137 domestic and 135 foreign PE fund managers in India. Over the last three years, VC/PE investments were the equivalent of 33% to 72% of the total equity raised from primary markets, the report said.
Economists estimate that India needs about $1.3 trillion investment over the next three years to sustain a GDP growth of 7-9%. This translates to $60-100 billion of VC/PE investments requirement over three years, against which industry estimates that PE investments would be in the range of $9-10 billion in the year ending December 31, 2010.