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PE Investments Are Back, But Is the Activity Sustainable?

03 August, 2010

The period Jan to June 2010 saw a significant revival in private equity investments in India. As compared to the same period last year, the volume of deals were up by about 36% and the amount invested by almost 240%. The period also saw a resurgence in larger sized transactions.

While there were no billion dollar transactions, 12 of the transactions saw investments of $100 million and higher, resulting in the average deal size at about $30.64 million vis-à-vis $12.17 million in the same period last year.

In terms of investment stage, both buyouts and PIPEs have decreased. Not surprisingly growth and late stage investments have grown considerably, accounting for almost 61% of the total transactions. PIPEs’ have decreased as LP’s have begun questioning GPs the rationale for investing in listed companies, especially in light of their negative performance witnessed in 2008 and 2009.  

While IT and ITES continued its dominance in volume terms, the energy sector saw the largest investment in value terms. The last quarter saw investments in this sector doubling in volume terms, and growing to seven times in value terms.

The energy sector has begun seeing more deal activity as PE firms are now much more comfortable with the regulatory environment which has developed over the past couple of years. With the delicensing of this sector, many private sector firms are setting up power transmission units to meet the significant demand for electricity in India. Add to it is the emergence of large sized infrastructure focused funds like IDFC Project Equity Fund, SBI Macquarie Infrastructure Fund, Standard Chartered IL&FS Asia Infrastructure Growth Fund, etc and other large PE firms like Temasek, Blackstone and General Atlantic amongst others, which are looking to invest in this sector actively.  

BFSI was the second largest investment sector both in volume and value terms. The space continues to be of interest as this industry is closely linked with the growth in domestic consumerism, and the focus is skewed more towards broking and insurance opportunities. With the emergence of niche sector focused funds for agriculture, education and for healthcare, the investment trend in this sector is growing and is expected to continue. 

Two of the top five deals were in power, while the rest were one each in telecom, financial services and retail. The largest transaction was $425 million by a consortium of investors in Asian Genco, a Singapore-based holding company that owns hydro, thermal and non-conventional power generation assets in India. The company plans to grow its power generation capacity from the current level of over 4,000 MW to 10,000 MW by 2012. Its two projects under development include Teesta III, which is among the largest hydro projects in the Indian private sector, and a coal-fired supercritical thermal project in Andhra Pradesh.

 

Enough Dry Power 

A lot of dry powder seems to be available in India, and according to some industry estimates this could be as high as $28 billion. This calls into question the need for additional capital to be available for India particularly in light of the fact that several industry individuals inspired by the success of some of the PE industry veterans efforts, have chosen to leave established funds and become entrepreneurs. It remains to be seen whether their efforts will be successful given the challenging fund raising environment for first time funds. LPs are also getting more stringent both interms of investment norms as well as investing in GPs with a successful track record. 

Although we have seen a resurgence of PE activity in the first six months, it is still significantly inadequate to meet the demand created by the fund supply given the availability of dry powder. Many investors also feel that quality deal flow is restricted which is reflected by the growth in secondary sales, to five in H1 of 2010 from only one in H1 of 2009. 

As a result of improving capital markets, there has been a growth in exits via IPOs growing to ten in H1 2010 from one in H1 2009, with public market sale continuing  to be the preferred mode of exit, accounting for almost 38% of the total exits. Another trend visible is the considerable growth in buybacks, growing to nine from only three in the same period, due to a combination of multiple reasons including promoters wanting to increase their ownership as well as funds enforcing their term sheet clause of buy-back using it as a down side protection to ensure minimum return on their investments which are about 3-4 years old.

In terms of capital being returned to the LP’s, the first half of the year saw a significant outflow. According to Asia Private Equity Review (APER), between Jan and May 2010 $ 756 million was returned to investors as compared to $108 million for the same period in the prior year. A lot of the capital returned was from investments made in 2005 and 2006.

Key Drivers 

The Government has unveiled a plan to setup a $ 11 Billion infrastructure Fund, which is by far the most ambitious undertaken by any Asian Government. Deepak Parekh has been given the charge to make this fund successful.

Some of the regulatory developments which will affect the private equity industry, most positively are the Direct Taxes Codes (DTC) Bill recommendations and changes in the Takeover code. The DTC recommendations aim to remove the inconsistencies as well as unintended hardships caused by certain provisions on the proposals made in the original DTC. 

The amendments in the Takeover code will impact the threshold level of making an open offer as well as not viewing a private equity investor as an insider, thereby making a  lot of listed mid-market firms an attractive investment opportunities. It also comes with a downside risk of increasing the cost of investment if the open offer is triggered. Industry bodies are very actively lobbying with the Government to make private equity investments more conducive as the benefits and impact of these are being witnessed. 

A recent survey conducted by Coller Capital concluded that institutional investors see India as the second most attractive destination for venture/ growth capital investments in the Asia-Pacific region over the next two years. 

All such trends only reaffirm that India is poised to grow as compared to H1 2010, both in volume terms and be considerably higher in value terms as the average deal size grows.

(Vikram Utamsingh is the Executive Director Head, Private Equity Group, KPMG India Private Limited.)

 


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PE Investments Are Back, But Is the Activity Sustainable?

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