Private Equity investments in India aggregates over $11bn in 2011, Four-S reports

2011 PE activty data from Four-S

Mumbai, January 3, 2012: The year 2011 saw 427 PE/VC deals worth $11.19bn compared to investments worth $7.96bn across 328 deals in 2010, shows data with research and financial consulting firm, Four-S Services. With drying-up of the public market as well as debt becoming costlier, India Inc. turned to PE investors for fresh funding.

The year also saw a surge in number of high value deals – there were 30 deals above $100mn in value (worth $5.91bn; 53% of total investments) compared 19 deals (worth $3.46bn) in 2010. Correspondingly, the average deal size for the year went up by 16% to $32.9mn.

The largest PE investment during the year was the $851mn commitment by Bain Capital and Singapore’s GIC to Hero Investments, the Hero group holding firm which is to buy out Honda Motors’ 26% stake in listed two-wheeler maker Hero Honda. This was followed by Apax Partner’s $480mn investment in NASDAQ-listed iGate Corp to buy Patni Computers. In another mega deal, Apollo Global Management invested $290mn in Welspun Corp as a part of its $500mn commitment to the Welspun Group. Blackstone Group’s owned Sithe Global Power invested around $261mn investment in SKS Chhattisgarh Power Generation. TPG committed $259.9mn to Shriram Capital, rounding up the top 5 investments of the year.

Infrastructure (including power) continues to remain one of the key investment themes for PE players. The sector topped the investment chart accounting for 27.8% of investments with a deal value of $3.11bn. The scale of deficit and government commitment to fund infrastructure projects, makes private participation in the sector one of the most compelling investment themes leading to growing PE’s interest.

The manufacturing sector occupied the second slot in terms of PE investments and totalled $2.02bn across 66 deals; this translates into 18.1% share. The sector was marked by some high value deals, including the largest transaction during the year – Bain Capital, GIC’s $851mn investment in Hero Investments.

The BFSI sector came next with $1.36bn investments across 40 deals. Fund managers believe that there are enough opportunities for private equity in virtually every facet of the financial services industry considering the rising income levels, focus on infrastructure spending, emphasis on financial inclusion, emergence of wealth managers and expected growth of the insurance industry.

However, the year was not so good for private equity exits. Against the backdrop of a difficult public market, PE exit volume fell 35% to 80 deals while value fell 49% to $2.69bn. This is in sharp contrast to 2010 when exits hit a record and there were 124 exit transactions worth $5.30bn on the back of robust capital markets. Fund managers were unable to match their exit timing with desired returns, and held back their portfolios.

Table: PE/ VC investments in India

	2007	2009	2009	2010	2011
Investment ($bn) y/y growth (%)	19.20 157%	11.16 -42%	4.25 -62%	7.96 87%	11.19 41%
No. of deals	382	344	250	328	427
Average deal size* ($mn)	57.2	38.8	20.9	28.4	32.9

* calculated over disclosed transactions

Source: Four-S Services

Table: Top 5 PE deals in 2011

Investors		Target	Stake (%)	Amount ($Mn)	Sector – Industry
Bain Capital, GIC	Hero Investments		29	851	Manufacturing – Auto
Apax partners	iGate Corp (Patni acquisition)		NA	480	Services – IT/ITeS
Apollo Global Management LLC	Welspun Corp		NA	290	Manufacturing – Metals
Blackstone	SKS Chhattisgarh Power Generation		NA	261	Infrastructure – Power
TPG	Shriram Capital		15.0	260	Services – BFSI

Source: Four-S Services

2008 deals

Sharp drop in PE fund raising in FY08. Numbers of deals also appears to have dropped 30% or so.

GetFeed

BMT Series – Gokaldas and Blackstone

(BMT stands for – Blow My Trumpet)

Business Standard today has this nice article on how PE players are all showing losses now. Amongst examples it cites are – Blackstone’s investment in Gokaldas. Blackstone had acquired 67% in Gokaldas at Rs 275 per share last year. The share price now is Rs 106. Blackstone’s $149mn investment is now $50mn.

Now I am doing some BMT . Here are some excerts from a 27 Aug 2007 post –

While Gokaldas has a lot to commend itself, there is one issue with this deal – it is a textile company. More than that, it is in the unbranded export space. Unbranded textile exports, or unbranded exports of any kind for that matter, aren’t an area where Indian investors have found great returns.
Gokaldas itself is proof enough that generic exports are a bad space. Right from the day it was listed, Gokaldas has underperformed the market. Gokaldas listed in April 2005. While it did trade at premium in the immediate aftermath of listing, it has rarely crossed the closing price since the first few days. If you had invested Rs 100 in Gokaldas the first day it was listed in Apr’05, you would now have Rs 80 or so (ignoring dividends). On the other hand, if you had put the same Rs 100 in the Sensex, you would have Rs 225 now. And this, when global and the US economy have seen the best expansion in 25 years.
The moral of the story is this – in cost plus businesses, it is very difficult to create sustainable market value. This is particularly so if the market place is fragmented, like in the sectors stated above. While in say oil, or metals, global scarcity happens every now and then and drives supernormal profits, even that does not happen in businesses like textiles.
Blackstone thus wants to do what no Indian management has demonstrated so far. One positive is that it has not overpaid (compared to current market price). Market speculation is that it is perhaps going to sell this company forward, and may have a buyer or two already in mind.

–

So, Blackstone didnt clearly have a magic wand to turn the fortunes of Gokaldas. Nothing really has improved in the performance of the company either.

GetFeed

Slowdown in new PE money for India

From available data, it seems there could be a slowdown in new India dedicated-money being collected by PE funds. So far, funds closed have raised around $4bn in 7 months of 2008, as tallied by me from available news reports. This appears far less than what should be the trend rate from 2007 or earlier.

At the end of 2007, some reports had suggested that there was $50bn of PE money already collected for India investments. Kindly note, this could have happened not necessarily in 2007, could be the aggregate of all commitments till 2007. Also, it is possible that this number was inflated. There is no reliable source of collating information on fund activity. Yet it is perhaps reasonable to assume that atleast $20bn of new fund commitments may have been made in 2007.

Ideally, is a rising or bullish market, new fund commitments would atleast total the amount already committed to deals. In 2007, around $20bn was invested. So that again is one benchmark to assume that upwards of $20bn may have been committed to India in 2007.

By the above logic, $4bn in 7 months appears less. Simple annualising suggests that around $7-8bn could get collected. However, often activities are lumpy, so final figure can be vastly different.

What’s is relatively clear is that pace of deal making hasn’t slowed down. Grant Thornton’s 1H08 report said amount of deals was around 5% up in the first half. There was some slowdown in number of deals, from an average of 33 deals a month in 2007 to around 31 deals a month in 1H08.

So this may be the bottomline – new funds are unlikely to enter in 2008. The existing funds have a good window over next 6 months (or more) to build a portfolio. Valuations are also reasonable – whether you are talking of pre-IPO equity or PIPEs.

GetFeed

Education – a missing pie in VC/PE action

While current sector allocation of VC/PE investment reflects India’s needs, education is one big sector to have missed out so far

While the VC/PE business has matured a lot in recent years, it is still instructive to see the dramatic transformation which has occurred in terms of where investments are going. Completely different sectors are soaking in money in 2008, compared to even 2-3 years ago.
The industry started off in the late’90s, when the first foreign firms started looking at India. The new entrants focused at IT and internet, much in line with the craze in US at that time. Quite a few of the early deals didn’t work out. The business really picked up only when investors broadened their horizons started looking at non-tech sectors like infrastructure, capital goods, financial services, retail and so on.
In the last three months, for example, infrastructure and real estate accounted for 30% of PE investments. Energy, telecom, media/entertainment, financial services, and manufacturing followed. Between them, these six sectors mentioned here accounted for 90% of all PE investments over the last three months. While this data may not be entirely accurate – some deals don’t report amount invested – the point here is, traditional VC/PE sectors like technology, internet, healthcare have perhaps accounted for less than 10% of investments this year so far. A clarification here – the distribution could look very different in the angel/VC space. PE deals tends to be large, and also focus on growth stage, rather than early stage. So the overall data here is perhaps coloured by trends in PE space.
The sectoral break up in 2008 seems to be vastly different even from say 2006, when IT/ITES accounted for about 20% of VC/PE money. Power/energy and real estate/infra barely accounted for 10% put together. So what does this all mean?
One inference – India is building up for the future. In terms of capital allocation, it seems about right that basic areas like infrastructure, real estate, energy, telecom get the largest share of investments; following by second order needs like financial services, logistics and manufacturing. Media/entertainment, internet, retail/consumer are perhaps third order needs, in a country like India.
Some of the basic sectors seem set to pull in a lot more money going forward, if the announcements in April so far are anything to go by. About $5bn of new funds have been announced in April so far, around 70% this dedicated money for real estate/infra. Some of the other money is sector agnostic, like Azim Premji’s newly announced $1bn fund – some of that could also fund infrastructure and energy.
However, PE investors are supposedly represent smart money – so this sector allocation could change just as rapidly a few quarters into the future.
For example, one sector which really hasn’t attracted meaningful VC/PE investment is education. A recent report by CLSA points out that private sector business in education is around $40bn. If CLSA estimate is correct, this makes education bigger than the healthcare sector, and almost as big as IT/ITES sector – the tradition favorites of VC/PE investors.
CLSA says – citing a household survey it seems to have commissioned – that education is the second largest item of middle-class household expenditure in India, after food. While a middle class household spends around 25% of monthly budget on food, around 9% goes to education, compared to 3% on healthcare. These ratios are very different from national averages, since CLSA’s sample set is intentionally different. CLSA has attempted to find the demand patterns of India’s consuming class.
Again, if this data is robust, it points to a great potential of education to throw up large businesses. One problem with education is that while private enterprises are there in basic schooling, and post secondary courses like engineering or management, most of these have been registered as trusts. There are ways to work around these restrictions – like for example, forming an operating company which the trust outsources or contracts out activities to. Outside of the formal schooling and graduation system, there could be number of opportunities in tuitions, assessments, vocational courses, e-enabling education, remote delivery, continuing education to name a few possibilities.

GetFeed

Big deals remain scarce

If you can’t build it, but it – i.e to do big deals, PE investors will have to think differently.

A Reuter’s report last Friday said the Asia head of a PE outfit was leaving within a year of joining. This firm apparently had has had difficulty closing large buyouts amid high prices for deals and a dearth of sellers in markets like China and India. Compared with rivals such as The Carlyle Group and Warburg Pincus, this firm arrived late to Asia. The report says the firm found that competition for assets was fierce.
While not exactly on this degree, but there are parallels to this story in India. The surge in Indian PE/VC deal market in the last 24 months has attracted many new foreign players.

Most PE or VC firms, which arrived in India in last 12 months, are perhaps finding the going a little tough. There seem to be quite a few firms which have done no deals yet, or at best 1-2 deals in say 12 months of being active in India. In other words, there are many of these firms are as yet finding their way around in the Indian markets.

A look at data would also give some indication. In the first quarter of 2008 (Jan-Mar), private equity firms invested about $3.3 billion in 97 deals according to Venture Intelligence. In Jan-Mar 2007, there were 101 deals. So while the number of PE firms is perhaps up 15-20% in the same period, the number of deals going around is roughly the same.

The learning here is simple – traditional PE models which apply in say US or Europe may not always work in India. For example, it is hard to do large deals in India, for more than one reasons – supply remains low, consequently valuations are often an issue. Deals like buyouts are still harder.

In Jan-Mar’08, there were perhaps 5-6 deals greater than $100mn, if you ignore real estate SPV kind of deals. There was perhaps only one buyout, if you count Paras, where Actis has reportedly upped its stake to 60%. So if you are a PE firm keen on large deals or majority ownership, what do you do?

While one answer would simply be – bide your time, be content do none or 1 deal a year if you don’t get the right deal and right valuations, and don’t bother about opening a local office. The other may be to try a different route of ownership – incubate firms which can quickly grow to reasonable size. In an economy like India, which will grow in the range of 7-10% over 1-2 decades, it may be possible to build multi-billion dollar businesses from scratch. So if you can’t buy it, build it.
The recent IPL franchise auction was one area for PE funds to get in at startup and build a large operation ground up. Recent reports have indicated that winners of IPL franchises are being chased by PE funds. Some deals will sure be announced in the coming months. Yet, the price at which any investment will happen now will be vastly different now. Consider this scenario – a PE investor puts together a team of operating types, and enters at bidding stage itself. The potential for wealth creation would be far greater in this route.

The recent auctioning for telecom licences that saw groups like Videocon, Unitech and dozens of other apply, was another example. Many of the new applicants are essentially acting as investors – they are in it more for capital gains, than to build and earn operating income. Their aim is – get the license, and offload equity to actual operating companies, multiply valuations by getting PE investors in, and exit at some point with hefty capital gains. In telecom infrastructure business, there is an example of company being built ground up by a PE investor, with majority ownership.

An example of building rapid value in a short period of time is Lemon Tree Hotels, which started by a first generation entrepreneur in 2002. Last week saw Shinsei Bank and Kotak’s PE arm pay $30mn for a 5.9% stake. This values the company at $500mn, or around Rs 2000 crore. This appears to makes Lemon Tree the third most valuable hotel company in India, behind only the Tata owned Indian Hotels, with a market cap of around 8000 cr or around $2000mn, and East India Hotels, with a market cap of Rs 5500 crore roughly $1350mn. Much older hotel chain Hotel Leela Venture is valued at $380mn and Asian Hotels at $280mn.

Warburg shows it remains the master of big ticket investing in India. It took a 27% stake in Lemon Tree in July’06 for Rs 210 crore, or a valuation of Rs 800 crore. At that point Lemon Tree had only 2 properties actually operational. Warburg’s stake could now be worth Rs 540 crore, or more than double in less than 2 years, at an IRR of around 65%.

GetFeed

Cotton County and Sequoia deal

This is what the website of this co says — Cotton County ‘catches the eye of the customer with attractive offers of heavy discounts’. Hardly the stuff to attact large PE investors.

Sequoia reportedly will invest upto Rs 120 crore in the rapidly growing garment retail business Nahar Retail. Better known by its brand name Cotton County, Nahar Retail attempts to do what very few have managed in India – build a profitable garment brand with an associated retail presence.

To be fair to Nahar Retail, it has covered a lot of ground since its launch. Some reports suggest that it has 400 plus outlets in 300 cities. This is a massive reach. However, in retail, it is one thing to quickly expand reach. It is quite another to build a profitable business. The retailer has to ensure that a majority of the stores break even and become decently profitable. This requires ensuring foot falls, then conversion of those foot falls into sales. Not every attempt succeeds in this.
Arvind Brands tried to build an aggressive retail presence in the about 6-8 years ago. It succeeded for a while, atleast in establishing a large network. But then it rolled back most of that strategy within 2-3 years, which seems to suggest that most of the stores never reached break even.

Not too many other players have attempted the kind of rollout Cotton County is upto. Kewal Kiran Clothing, an older player in the garment business, took perhaps three years to reach the 75 stores mark. In total, the company perhaps reaches out to 60-70 cities at this point through around 100 outlets. Pantaloon Retail which overall has perhaps 1000 stores in around 80 formats, has around 40 stores under the format Pantaloon Fresh Fashions. Raymond has close to 500 outlets, but it has built them over decades. Madura Garments, part of Aditya Birla Nuvo, has close to 250 exclusive brand outlets in 43 cities.

Cotton County thus appears to be betting more aggressively than practically any other player in the garment space. It perhaps is a work-in-progress, atleast if its website is any indication. Its mission is stated thus – ‘We aim to be recognized as the fastest growing retail chain in the Everyday low Pricing business model’. Elsewhere it describes itself as a mass-volume brand. The website says Cotton County ‘catches the eye of the customer with attractive offers of heavy discounts’. This needs some straightening out. Perhaps the company strategy is more coherent that the website.

Building a strong garment brand is not easy, since barriers to entry remain rather low. It is hard to attain product and format differentiation. There is large fragmentation, and competition from small players. Large players have so far not really tried to compete on the price platform. Old established companies like Madura, Arvind and Zodiac, to name a few, are all relatively upmarket in their positioning. Amongst new successful players, Provogue and Wills Lifestyle have also consistently taken premium positioning.

Clearly, a value positioning, with wide reach has theoretical appeal. India after all is about its vast middle class. But garments are aspirational products. A brand positioned on price runs the danger of being perceived as a poor man’s brand. There are quite a few cases of garment brands which have stagnated due to a ‘nowhere’ positioning. While you can perhaps sell a mobile service on price, it may be harder to sell garments on price.

Cotton County may well emerge as India’s largest garment company if it is successful. But how much value will it create? According to reports, Cotton County is currently around Rs 100 crore in sales, and aims to be a Rs 250 crore business by FY09. Madura Garments registered sales of Rs 750 crore in FY07, with PBIT of Rs 4 crore. An Enam report of 2007 valued Madura Garment business at around Rs 500 crore, or less than 1x sales. This is despite strong brands and consistent sales growth. Zodiac has also struggled to beat valuation of 1x sales. Provogue may the only garment brand which has commanded high valuations with some consistency.
Garment remains a tough business to make profits out of. So when large funds bet on textiles despite this, then you know India story is hot.

GetFeed

Time to focus for PEs?"

Is there scope in India for focused funds like Kleiner Perkins’ iFund?

In these uncertain times for investors, it is heartening to note that there is always a market for innovation. Kleiner Perkins Caulfield & Byers (KPCB) announced the launch of a $100 mn fund called iFund to support development for Apple’s products earlier this month. To use KPCB’s language, iFund will fund ‘market-changing ideas and products that extend the iPhone and iPod touch platform’.

While the US is by far the global leader in innovation, this is unusual even by global standards. While sector funds have been around in the US, and are even been seen to India to a limited extent, funds targeting one company and its ecosystem are a rare phenomenon. The only other comparable apparently is Appfactory, a fund launched in July’07, for supporting Facebook applications; Appfactory does not disclose fund size.

Both funds appear targeted at early, seed to angel stage funding. Appfactory says it is targeting ‘tens of investments of $25,000 to $250,000 using a flexible, fast-track approval process’. The iFund has a wider focus, and will invest anywhere from $100K of seed capital to $15M of expansion capital in mobile application and services companies. In what is not so common atleast in the Indian scenario, both websites host an application form, presumable to fast track the decision making process.

Implications for Indian VC space – firstly, both funds may be of some interest to Indian innovators. There are young firms trying to think of value added services in internet and mobile space. Who knows – some of them could get funding from these funds.

More importantly, are such funds possible in India? Indian VC and angel space is still in early stages of evolution. While late ‘90s had seen some tech specific early stage funds, in this decade fund houses mostly diversified their focus. However, with the spurt of funds the last 2 years, some focus is beginning to emerge. The most clearly defined are real estate and infrastructure funds, but then, one reason there is that investment characteristics there are different. While there are some funds focusing on say consumer sectors, but that is a very broad definition.

One reason very narrow focus hasn’t come around in India so far, is perhaps, the market is still very narrow. There isn’t enough entrepreneurial activity and not too many investible companies, if you define your slice too thinly. Try thinking of an Indian product or service which can support an iFund or Appfactory like fund, and you have draw a blank.

There are very Indian products and services, which are innovative, scalable, and provide a platform interesting enough for lot of vendor development. The hottest product innovation to have come out of India in a while is perhaps Tata Motor’s Nano, which is also spurring a notion of India as the small car base to the world. Bajaj Auto has also announced plans for a small car, and some foreign manufacturers are expected to follow suit. Can there be a fund aiming to fund vendors trying to innovate or scale up for small cars? The first few months of Nano could indicate this, but auto ancillary space is perhaps not attractive enough for VC or PE funding.

As a narrow slice, the mobile space perhaps has enough numbers to sustain a focused fund. While internet access only limited yet to 30-40 million Indians, over 250 million Indians own a mobile. Growth rates perhaps remain higher in mobile compared to internet. Companies aiming to provide mobile value added services (VAS) are few, and most are far off from cash break even. Dozens of new companies will still enter. Ram Shriram of Sherpalo commented in The Economic Times last week that there is a google waiting to happen in the mobile space, and it could well be from India.

Outside of the innovation space, cross border M&A could potentially support focused funds as well. According to Dealtracker by Grant Thornton, in 2007, Indian companies well over 200 overseas acquisitions. Another report by Virtus Global Partners says Indian companies acquired 83 US companies in 2007. Almost all of these acquisitions were funded by cash, which means acquirers would have used either internal accruals or would have raised funds. Around 60-70% of these acquisitions tend to be of size less than $25mn. Innovation heavy sectors like IT and healthcare dominate outbound M&As.

GetFeed

PE flows still strong

While secondary markets remain nervous, no signs of slowdown yet in the private equity space

Is the public primary market turmoil affecting PE sector yet? From the trend in February, it does appear to be so. With a week still left to go, fund raising from private markets has been fairly good. About $1.6bn has been raised so far. If you annualize this, this is a run rate of over $20bn, which is better than 2007.

There’s not much impact in number of deals either. Around 24 deals have been announced, which us about deal a day. Around 400 deals were in 2007, a little over a deal a day. So the current run rate is not too bad.

What is discernible maybe is some impact on investments in listed equity by private equity (PIPE) deals. It appears only one PIPE deal has been announced so far. According to PE investors, while share prices have come down, promoters are not yet willing to reconcile to them. PE investors will naturally not pay the price which was prevailing 2 months ago at this time. Take the case of a building material company, which was quoting at around Rs 230 levels 1-2 months ago. It wanted to do a PIPE deal at Rs 270, while PE investors were not willing to go beyond Rs 250. The deal didn’t happen. Now the company quotes well below Rs 200. Clearly promoters may prefer to wait at this point. If the stock does not cross Rs 200 for say the next 3-4 months, then they be forced to go in at a lower price. Most companies do have expansion plans, which hopefully can’t be put on hold indefinitely.

The one big PIPE deal was announced last week, where Blackstone committed $60mn to Allcargo Global. The interesting part was Blackstone agreed to pay a premium to 30% to the market price on the day of the announcement. Blackstone agreed to pay Rs 934 per share, compared to a market price of Rs 725. Allcargo had underperformed the market in recent months, having seen a high of Rs 1300 at one point. But that was quite some months ago, so perhaps promoter expectations had come down, otherwise they may have wanted to raise money at say Rs 1500 per share.

A premium at this point is a vote of confidence in the India growth story. Allcargo and its peers like Gateway Distriparks were hot stocks 1-2 years ago, but have languished since then. Both have container freight stations (CFS) as their primary business, which is a bit like a commercial real estate business. You get rent for letting others use your real estate. About a couple of years ago, there was acute shortage of space at Mumbai, where both these companies have CFS points. So they made supernormal profits. Once scarcity went, margins fell sharply, and profit growth slowed down considerably. However, long term growth potential for logistic stocks remains, and that perhaps explains the premium. Allcargo has also overtaken Gateway in market cap, and investor perception. Allcargo has been far more successful in its diversifying its business from the relatively plain vanilla CFS business.

Some other deals of February also tend to suggest that PE investors are still willing to take long term bets. Soros’ investment in Reliance Entertainment at a reported valuation of $3bn appears aggressive. While valuation mismatches and global issues still cloud secondary markets, it appears there are still takers for the long term India story.

GetFeed

PEs need to create deals

Fund managers will have create deals and bring value to stay ahead in the overcrowding PE/VC market in 2008

2007 will end as a remarkable year for the PE business in India. Recent reports have suggested that PE business may have crossed $17bn for the year, more than double of $7.5 bn done in 2006. India has also reportedly overtaken China in PE stakes. According to media reports, till Oct’07, India had seen around $5bn more of deals as compared to China.

PE fund raising has matched or exceeded the public market – IPO/FPO – route in recent years. In 2006, fund raising from PEs had exceeded domestic IPOs and FPOs by around 50%. In 2007, IPO/FPO route almost tripled to over Rs 73,000 crore ($18bn). So while PE could not exceed domestic public markets, it still nearly matched it. PE has clearly emerged a credible alternative to IPOs/FPOs for late stage and listed companies.

After all these big and excellent numbers, where do we go in 2008?
First point – clearly no one expects any slowdowns. These numbers can only grow. “Investors are very bullish on the India story. More money is clearly headed India’s way” says Sarath Naru, managing partner, Venture East. “New funds are still entering, and India allocations of global funds continue to increase” says Srini Vudayagiri, managing director, Lightspeed Venture Partners.

A recent report by Evalueserve had indicated, there are around 400 PE funds in India now, which already have commitment of close to $50bn to invest in India. While fund managers think active funds are less, the consensus seems to be – active funds and moneys available will go up in 2008. So is there enough for everyone?

In 2007, around 400 deals happened, from around 300 in 2006, a growth of 33%. Everyone agrees there will be more deals in 2008. Let’s work some numbers. Most funds will do atleast 3-4 deals a year. So even if number of deals grows 50% to say 600 in 2007, and each fund does 3 on an average, that’s enough space for 200 funds.
“Overcrowding is already happening” says Naru. “This is more so in late stage deals, where ticket sizes are $15 or more” says Nilesh Mehta, managing partner, Aureos India Advisors. This has two consequences – valuation will go up, and questionable deals will get done.

There will be various ways to deal with this. If you do deals through intermediaries, and all you bring to the table is money, then you are going to have to bid up the price and sacrifice returns. “One way to have proprietary deal flow is to create deals” says Naru. Can you for example bring two companies together and fund the acquisition? Funds will have to have deep sector or local knowledge and networking for this. “Intermediaries won’t normally think of such deals” says Naru.
“You will have to be able to bring value to deals” says Mehta. This can be either through opening doors for new business, or synergies with a similar company in your global portfolio. Blackstone, when it bought Intelenet last year, reportedly promised to give business to it as well. Global funds also fund it easier to deals when they have done a similar deal in US or China.

Funds may have to specialize and build sector focus, agree most PEs. That would be the only way to bring added value to deals.

There is less competition in early and seed stage. “Less than 10 crore deal size is a different market altogether” says Rajesh Jain, founder of Emergic Venture Capital. Rajesh, who has perhaps the most well rounded portfolio of early stage digital plays says while there are less players in VC and angel space, quality, fundable deals are the issue here. “Entrepreneurs need to be more creative to build scale” he says. In both the internet and mobile space, entrepreneurs aren’t coming up with credible businesses which will gel with Indian customers.

Among sectors, infrastructure and real estate will perhaps see a lot of flows. “Power, water and waste management could see large deals” says Srini. In mid size deals, scalable consumer plays remain the hottest area in mid size deals, while outsourcing led businesses have lost some luster. In consumer plays, healthcare, education, media and entertainment are top of the list. “Healthcare is a huge opportunity. Preventive healthcare does not exist in India” says Srini. In IT, now the focus is more on domestic plays. Funds are keen on companies trying to cater to Indian SMEs, preferably using software as a service (SaaS) concept.

An Indian fund may break into the league of top 50 global funds in 2008. An AUM of around $4bn can achieve that goal, and ICICI Ventures could get there in 2008. It has over $2bn under management currently, and wants to reach an AUM of $10bn by 2010
And finally, funds will have to work harder. Doing deals through intermediaries will clearly not work. The smart fund managers will get out of their offices and meet more companies, if they are to close deals in 2008.

GetFeed