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Private equity, venture capital deals start gathering pace

Private equity (PE) and venture capital (VC) deals in India are seeing an uptrend again.


And if market sources are to be believed, the numbers will only get better going forward.

Vikram Utamsingh, head of private equity advisory group at KPMG, believes some funds that were busy adding value to their portfolio companies after the global meltdown are now looking at fresh investments.

"Deal flow is happening. There is greater confidence than seen in the past nine months," Utamsingh said.

Sequoia Capital on Thursday made a Rs 40 crore investment in telephone service provider Just Dial. Days before that, Lightspeed

Venture Partners invested a similar sum in the pre-paid cards business of Itz Cash, where even the first-round investors, Matrix Partners and Intel Cap-ital, invested Rs 8 crore and Rs 2 crore, respectively.

Matrix also announced an investment of Rs 100 crore in FIITJEE, a company that prepares IIT-screening tests.

The education sector has seen a few more deals, including a nearly Rs 1 crore investment in Learning Mate.

The size of the deals, however, is declining and may remain small for some time.

"As valuations get smaller, so do deal sizes. But we generally invest between Rs 10 crore and Rs 200 crore," said Sandeep Singhal, managing director, Sequoia Capital.

"Deal sizes are shrinking. But that is happening because the companies that want a higher sum have more alternative options.
For instance, public private companies are looking at QIPs (qualified institutional placements), debt and then the private equity option. Right now realtors are using the QIP option, but it may come back in favour with other sectors," says Utamsingh.

Deals are mostly happening around small private companies who have no other financing options available.

Where firms are willing to invest a higher sum, valuations and equity dilution are acting as deterrents.

Bejul Somaia, managing director of Lightspeed Advisory Services India says his company actually wanted to invest more in Itz Cash Card but couldn't. Earlier, microfinance firms, too, saw some investments.

Among others, Bhartiya Samruddhi Finance of the Hyderabad-based BASIX group got a Rs 50 crore series-B funding from Lok Capital LLC, Aavishkaar Goodwell India Microfinance Development Company and Small Industries Development Bank of India.

Towards the end of May 2009, Sequoia Capital India and Silicon Valley Bank picked up a minority stake in web-based advertising company Ideacts Innovations for $2-3 million.

More investments are expected as many more new funds are entering the market.

UTI Asset Management Company UTI AMC has announced plans to set up the India Infrastructure Development Fund worth $500 million.

It has two offshore partners -- HSH Nordbank of Germany and Noor Financial Investment Company of Kuwait.

State Bank of India, IDBI Bank and Dhanalakshmi Bank, private equity arms of corporates and seasoned Indian PE players are also planning to raise money though this route.

Among others, Reliance Private Equity will be raising Rs 2,000 crore, while Axis Private Equity plans to raise a similar amount under the second closing of its Axis Infrastructure Fund. What a change a year can bring about.

Not many PE and VCs were raising funds 12 months back, primarily because they were sitting on a lot of cash and valuations were not stable enough to look at investing.

"In the coming months, especially if the stock markets continue being volatile, we will see a lot more action. We will see larger deals happening over the next six months. Even sellers or promoters have realised that the valuations derived currently are sensible. They have come down and have adjusted their expectations," says Utamsingh.
What are the sectors likely to find favour?

Data and trends provider Venture Intelligence says venture capital firms invested $117 million over 27 deals in India during the six months ended June 2009 compared with $413 million being invested across 67 deals in the first half of 2008.

But the scene is swiftly changing. Nikhil Khattau, managing director at Mayfield Advisors says "lots of deals are flowing in and we continue to look at them."

Asked whether investee companies were raising their valuation expectations after the sentiments have improved, he says, "I don't think it's gone back to the earlier valuations. There is also a cost of not raising money. So companies are actually looking at more realistic valuations."

A Venture Intelligence survey of over 60 PEs & VCs indicates that the investors are especially keen to tap into sectors like diagnostic services, medical devices or equipment, hospital chains and wellness products.

"We are looking at infrastructure, agriculture, manufacturing and even retail," says Niren Shah of Norwest Venture Partners.
Asked whether infrastructure funding matches the time-horizon that PEs and VCs have on mind, Shah said that varied from area to area.

"It depends on what area you are looking at. Though the agriculture and infrastructure cycle takes a long-time, we mayenter at the growth equity phase and so the 3-5 years horizon may suit," he said.

Trickle of deals
VC firms invested $117 million over 27 deals in India during the six months ended June 2009.

Investors are keen to tap into sectors like diagnostic services, medical equipment, hospital chains and wellness products
The QIP option used by realtors may find favour with other sectors, says a PE consultant.

Source: DNA India

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