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Top 10 Trends in VC/PE Investing In 2009

29 December, 2009

2009 was no ordinary year for the alternative asset industry—private equity (PE), venture capital (VC), real estate and hedge funds. According to data from VCCEdge, the financial research platform of VCCircle, PE deal value fell by 65% from $11.96 billion in 2008 to $4.2 billion in 2009 (till December 23, 2009) while deal volume fell by 44% from 502 in 2008 to 280 in 2009. While the numbers suggest a rather inactive deal environment, 2009 has thrown up some fundamental changes in the industry such as the emergence of LPs (or investors in PE) as a powerful class and the rise of deep-pocketed domestic investors. VCCircle spots 10 dominant trends in 2009, some of which will be a game-changer for the industry.

LPs call the shots: Institutional investors are questioning the compensation of GPs (managers of PE funds) and have proposed sweeping changes in the LP-GP relationship. “The balance of power has shifted to LPs”, asserts Rahim Penangwala, Head of India (Private Equity), of LGT Capital Partners AG. About 10 European and Asian development financial institutions including CDC, the UK government-backed fund of funds, have endorsed the Institutional Limited Partners Association (ILPA) PE principles, which calls for moderate management fees, accrual of transaction fees into the fund and equity participation by GPs in the fund.

PEs chase liquidity: Institutional investors were busy liquidating their interests in PE funds to rebalance their assets and reduce their unfunded liabilities. So, the secondary markets became active with participation from a lot of LPs as these (secondary) positions were available at steep discounts. “The turnaround in the markets forced many institutional investors to (take a) relook at their portfolios created in 2006-07. The markets have moved from premium NAVs (net asset values) to discount NAVs. This is largely the function of the downward trends of underlying valuation. Even though the environment is benign, Indian PE, as a whole, hasn’t made money,” said PV Wang, Partner, Adams Street Partners Llc, a player in secondary transactions.

Keeping house in order: PE/VC fund managers spent bulk of 2009 empowering their portfolio companies to beat the downturn instead of signing on new deals. “We are finding it difficult to put money to work,” said one PE fund manager, requesting anonymity. A lot of effort went on receivables and ensuring a healthy top line growth for companies, he added. Not surprisingly, the deal volume crashed by 44% in 2009.

Renewable Energy & MFI garner VC/PE eyeballs:  With the government offering a generation-based incentive to wind power producers, this segment may see more action and deals. IDFC Private Equity, the largest investor in the renewable energy space, continued to strengthen its position by acquiring wind energy assets of BP Energy India Pvt Ltd at an enterprise valuation of $95 million (Rs 463 crore). Microfinance, the other fast-growing niche, recorded 16 deals worth $80 million as on December 24, 2009, as per VCCEdge data.

Rise of the domestic LP class: A dozen funds, mostly captive arms of institutions and corporate, such as ICICI Ventures, Reliance Private Equity, Milestone Religare Investment Advisors Pvt Ltd, IL&FS Investment Managers Ltd, Kotak Realty Fund, Tata Capital and Piramal real estate fund are raising domestic capital. ICICI Venture tapped the domestic market to raise $250-million and a follow-on $100 million as the first tranche of its $500-million fund. Reliance Equity Advisors, the PE arm of the Anil Dhirubhai Ambani Group, is nearing the close of Rs 1,500-crore from domestic institutions and high networth individuals. Domestic money is emerging as a sizeable pool of capital to power the Indian private equity gravy train and 2009 may just be the beginning of that trend.

Foreign Funds Shut Shop, PE Stalwarts Go Solo: Not being able to replicate the global model in India and victimised by the slowdown, four overseas private equity firms and 25-30 hedge and sovereign funds shut their India operations in the past year. UK-based private equity fund Englefield Capital, FirstRand Bank Ltd, Candover (a UK-based PE fund, unable to raise an Asia or/and India-focused fund) and Australian investment firm Babcock & Brown were among those who pulled down shutters in India. “A lot of hedge funds doing private equity shut shops in India. This has helped in making the valuations realistic,” said Vivek Sekhar, MD, 2i Capital, a Delhi-based private equity fund. The industry also saw exits of professionals from prominent PE funds. Renuka Ramnath, the managing director and CEO of ICICI Venture, quit the firm to go solo. N. “Subbu” Subramaniam, a partner with Baring Private Equity Partners India, quit the Delhi-based PE firm on a bitter note.

Realty QIP Party:  Aided by the investor-friendly qualified institutional placement norms, real estate hosted a big QIP party in 2009. Reeling under debt overhang and negative buying sentiment from end users, a host of real estate companies like Unitech, Indiabulls Real Estate, DLF, Parsvnath Developers, and HDIL raised money via QIPs. Sentiment improved with the successful share sales by Indiabulls Real Estate, Unitech and DLF, prompting more builders to seek board approval to raise money via share placements and getting cheap debt replaced with expensive equity.

PE Biggies Inactive: Apart from Blackstone, which invested in Gateway Rail Freight and Allcargo Logistics, there were hardly any major investments from the bigger PE players. Carlyle made one investment in Allsec Technologies and Warburg Pincus invested in Synergy Media & Entertainment. Apax Partners struck no deals this year. One reason could be that large PE firms were focused on China in 2009.

Fund raising more challenging: As the markets turned, a lot of PE funds on road to raise commitments from LPs had to defer their plans. About 78 funds are out to raise money, says a report by Preqin, a London-based research body tracking the PE space. The due diligence process by LPs has got a lot tougher. Only those who had returned capital to LPs in the past were able to raise money. India Value Fund Advisors ($725-million Fund IV) and IL&FS Investment Managers ($225 million for Tara Fund III) were among the few to finish big ticket fund-raising.

Series B turns VCs’ sweet spot: There is little action in early-stage investing with VCs putting their equity in companies with proof of concept, revenues and an initial round of funding. Investing in later-stage companies shortens the VC’s gestation period. Series B, or second round of fund-raising by startups, turned a favoured investment stage with 24 deals in 2009 valued at $173 million against 15 deals in 2008 ($104 million), VCCEdge data shows.


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3 Comments
keyur . 6 years ago

Hi, a very nice article and sorted trends in PE/VC industry

Venugopal . 6 years ago

Does this mean to say that the VCs have become more Risk Averse ? That they have started to become more safer in their investments.

Early stage investments encourages and emboldens more and more aspiring entrepreneurs to start their ventures. However if the VCs start playing a safer game then the entire ecosystem suffers.

So is Micro VC funds such as Y Combinator a better bet for entrepreneurship and for the ecosystem.

Yashraj . 6 years ago

Well, certainly the article raises concerns as the VC’s outlook has changed and have started playing in safe zone!! The number of deals have gone down so the encouragement to small and medium start-ups too.

Top 10 Trends in VC/PE Investing In 2009

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