Private equity (PE) and venture capital (VC) deals suffered a 60% crash to close the year (calendar) 2009 at $4.4 billion against $11.9 billion in 2008 as the alternative assets industry turned out to be one of major casualties of the economic slowdown.

The good news, however, is that PE and VC investors have returned to a-deal-a-day statistic in the October-December (2009) quarter for the first time since the Lehman Brothers’ collapse in September 2008, suggesting an increase in deal-making activity which could spill over into 2010. In line with the buoyant numbers in the last quarter, around 62% of VC and PE investors, who took part in the VCCircle Deal Outlook 2010 Survey, said, they would ink more deals in 2010.

"The trend has changed since June onwards and there is a sustained revival. From now onwards, in the first six months of 2010, we will see an increase in PE investments," said K Srinivas, managing partner at BTS Investment Advisors Ltd.

At 93 deals last quarter (2009), investors fared much better than the preceding quarters (about 60 deals each) but they are yet to match up with the peak when as many as 195 deals were struck in Q1 of 2008.

The last three quarters of 2009 also recorded a deal value of over $1-billion each. Compare this with Q1 of 2009 when the total value of PE/VC deals shrank to $668 million, the lowest value in any quarter since Q4 of 2005, according to data from VCCEdge, the financial research platform of VCCircle.

With markets hitting the bottom, the valuation differences between promoters and PEs increased, leading to a decline in deals. "With the slowdown in business since 2008, the growth story being projected by entrepreneurs was hard for PE players to believe," added Srinivas.

India Inc’s cautious stance, particularly on outbound deals (or acquisition of overseas firms) pulled down Mergers & Acquisitions (M&As) activity in 2009. M&A deal value dropped to more than half at $12.5 billion in 2009 from $25.1 billion in 2008. Unless India Inc. sees a significant pick-up in large-sized transactions, it is unlikely that M&A numbers would touch 2007 levels, when mega deals pushed up annual M&A value to over $43 billion.

The VCCEdge data reveals that inbound deals and domestic deals (between two Indian firms) did not see a significant drop in M&A deal activity at 273 deals in 2009 compared to 276 in 2008 while outbound deal volumes halved in 2009 from peak levels of 2008 when as many as 170 overseas acquisitions were struck. Although value of both outbound as well as ‘Indian’ deals declined in 2009, the drop in outbound transactions is prominent. Against 30% decline in value of ‘Indian’ deals to $10.14 billion, outbound deals dived by over 80% to just $1.84 billion last year.

Investment bankers, who took part in the VCCircle Deal Outlook 2010 Survey, felt that M&A activity in 2010 would continue to be dominated by inbound deals with multinationals looking to buy into the India growth story.

The year did not see much action on large-ticket PE deals. In fact, the above $100-million deals more than halved from over two dozen in both 2007 and 2008 calendar years to just around 10 in 2009. The VCCEdge data suggests that deal sizes up to $10 million remained unaffected while those transactions above this threshold suffered a sharp decline. "Early stage valuations have not been a concern for us whereas growth stage valuations have been rich and will likely to be the same," said Alok Mittal, general partner at Canaan Partners.

PE investments reached a peak in 2007 with 358 deals and 349 deals in 2008, followed by a steep drop to 181 deals in 2009. VC firms, on the other hand, accelerated the pedal in 2008 despite the market crash as deals rose almost 30% over 2007 to 134 in 2008 even as angle/seed funding declined marginally. This, however, came down to 91 last year as both VC and angel-seed funding deals also collapsed. VC investments (deal value) declined 52% to $314 million in 2009.

Real estate sector ruled in terms of value of PE/VC deals, cornering as much as $657 million of money, followed by IT/ITES at $621 million. Energy, logistics, telecom, media & entertainment, banking, finance & insurance, hospitality & travel and agriculture notched up deals worth $200 million or more. Telecom continued to top the average PE/VC deal size chart with $112 million. While energy ($44.83 million) and real estate ($43.8 million) were neck and neck at number two spot, logistics ($27 million) and IT/ITES ($17.7 million) completed the list.

Will 2010 see the industry covering lost ground? The fundamentals of the Indian economy are in place, including overall economic growth, efficient capital models and good quality of entrepreneurs, said Kanwaljit Singh, managing director of Helion Venture Partners. These factors could make 2010 a busy year for deal-makers.

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