Private equity deal-making continued to gain momentum in the first half of CY2011 as deal volume increased 31 per cent and the deal value jumped by 57.3 per cent. According to VCCedge, the financial research platform of VCCircle, the total number of deals in H1 stood at 240, with a value of $5.76 billion.

At this rate, PE deals are set to overtake the numbers of 2010, possibly during Q3, both in terms of deal value and volume. 2010 had witnessed $8.05 billion of capital invested across 369 private equity and venture capital deals – a jump of 79.5 per cent, to be precise.

But the slowdown in exits, which are down 38.5 per cent in value in H1, can spoil the Indian private equity party in 2011.

Private Equity Deal-Making

PE investors continued to be busy as Q2 witnessed an increasing number of deals – both on a year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) basis. Total PE investments went up 71.5 per cent from $1.83 billion in Q2 2010 to $3.14 billion in Q2 2011. Deal volume also increased 52 per cent, from 90 to 137, during the same period.

On a sequential basis, the number of deals increased by over a third, with deal value rising 20.4 per cent in Q2, as compared to Q1 2011.

Industrials, materials and consumer discretionary were the most targeted sectors for investment, with deals worth $989 million, $664 million and $479 million respectively.

The median deal size rose 10 per cent to $11 million and the average deal value increased 21 per cent to $29 million in Q2 2011, as compared to the same period last year.

While the private equity deals under $50 million accounted for 67.15 per cent of the deal volume in Q2, deals exceeding $100 million accounted for nearly half of the value in Q2 as global private equity majors like Warburg Pincus and Apollo Management closed multiple big-ticket transactions.

The largest transaction during Q2 was Apollo Management’s Rs 1,305 crore ($287 million) investment in pipe manufacturing firm Welspun Corp Ltd through convertibledebentures and global depository receipts or GDRs.

The Exit Market

Private equity exit market continued to remain lacklustre as the number of deals fell 28.75 per cent to 57 and the deal value dropped 38.5 per cent to $1.37 billion in H1 2011 (as compared to H1 2010). This comes after 2010, which was a record year for PE/VC exits in India, with investors encashing $5.04 billion across 164 exit transactions.

The fall was more drastic in Q2 2011 as it recorded 54 per cent drop in exit value to $620 million coming from 26 exit deals, a dip of 37 per cent in exit volume as compared to Q2 2010.

Indian capital markets have remained volatile due to factors ranging from inflation to Euro zone debt crisis, which has closed the IPO window for many firms, especially in the real estate and infrastructure space. While private equity firms have been using alternative exit routes like M&A deals and secondary transactions, capital markets (both open markets & IPO) remain the key exit channel.

The largest exit came in May when Blackstone sold its stake in business process outsourcing firm Intelenet to UK’s Serco for over $500 million. This deal also accounted for 80 per cent of the deal value during the Q2.

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