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Tuesday, November 8, 2011

Private equity deals halve as investment firms sit on the fence

This story first appeared in DNA Money edition on Thursday November 03, 2011.

Private equity (PE) investments in India continue to fall.
PE firms invested around $186 million across 15 deals in October as compared to $347 million in 26 deals in the same month last year, according to data by brokerage J M Financial. The decline in the amount invested and number of deals closed was 46% and 42%, respectively.

In the third quarter of the calendar year 2011, PE firms invested about $2,249 million across 98 deals as against $2,357 million spread over 111 deals a year ago. The third-quarter deal value was also lower in comparison to April-June, the preceding quarter, wherein a total of $2,911 million was put in across 122 deals.

While the decline is very steep, industry experts feel that generalising investment momentum based on a month-on-month data would be unfair.

Avinash Gupta, national leader - financial advisory practice, Deloitte Touche Tohmatsu I (P) Ltd, said, “I think responding to numbers registered in a certain short span is not the right way to look at the overall investment approach by PE firms. This is because one lumpy deal can completely change all the equations and things can suddenly start looking very different.”

However, Gupta agreed that slowdown in investment activity is visible and overall macroeconomic scenario globally is depressing the investment sentiment.

Gupta said there is a high level of uncertainty in the market and hence things are slow. Valuations are being impacted, particularly because interest rates and inflation levels are soaring, he said, adding, the general economic activity and slowdown in demand has made promoters of businesses unsure about their growth plans.

“Companies are still contemplating whether or not to invest in building capacity and to raise funds for it. So while there is enough money with PE firms, which are at various stages of their investment terms, they are adopting a wait-and-watch approach at the moment. It’s a mixed bag in the private investment market where we are seeing decent activity, but deal closures are happening at their own pace,” Gupta said.

However, despite sluggish investment momentum, the average deal size in October 2011 increased to $17 million as compared to $14 million in the same month last year.

The key sectors that saw PE money flow in were consumer, IT/ITeS and financial services with deal values accounting for 21%, 21% and 17% of the total investment. The data also indicated that this year PE firms increased their focus on unlisted companies with 87% of the overall deals as compared to 81% in October 2010.

Top deals in October included $32 million investment in India Infoline by The Carlyle Group, Reliance Equity Advisors’ significant minority stake in VVF for $28 million, co-investment of $25 million by NEA, Canaan Partners and Silicon Valley Bank in Naaptol Online Shopping, investment of $22 million in Max Flex and Imaging Systems by Reliance Equity Advisors and CLSA Capital’s $22 million placement in Resonance Eduventures.

In all, October 2011 witnessed three exits, the largest being $73 million by Warburg Pincus in Kotak Mahindra Bank.

While fundraising environment remained challenging, three new funds were closed, including second close of $550 million by Tata Capital for Tata Opportunities Fund.

On the other hand, two new funds were announced by KKR and SBI Macquarie, wherein the former is raising $6 billion for its second Asian Buyout Fund and the latter is planning to raise $1-1.5 billion for its second infra fund.

A senior official from one of the leading advisory firms said, “It will remain challenging for a lot of PE firms as their limited partners, or investors in the funds, now would like to see returns for their investments made in the past. PE firms which have an interesting theme and investment strategy may still be able to attract some LPs, but others will have to demonstrate performance and focus on making exits with decent returns.”

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