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PE firms may close India operations over economic uncertainty

Rising economic uncertainty will lead to several private equity (PE) firms closing their India operations in the coming months fear industry watchers.

“”Due to the imminent slowdown in the economy, arising out of uncertainty in the global markets, decline in factory output and the weakening of the rupee, several PE firms are finding the going tough and a few could even shut shop in the months to come,”” said Rahul Bhasin, managing partner at Baring Private Equity Partners.

The first signs are already visible in the shelving of plans for a growth fund by marquee venture capital firm Accel Partners. Earlier this year, the Silicon Valley firm was in talks to raise about $400 million growth fund, which was aimed at making investments in the $10-30 million in India. These plans are now on hold.

Canada-based PE fund SITQ is winding up its operations in the country as it not been able to identify deals in the ‘right value’. SITQ had plans to invest up to $1.6 billion in the real estate sector and had entered the
country in 2007.

“”We did not find the right formula to make direct investments in India and direct investments take time to achieve,”” said a spokesperson at SITQ over an email response to ET.

An email sent to Accel Partners did not elicit any response. Tough market conditions and increased competition among PE investors in the country was the reason why Accel shelved its growth fund, as per people familiar with the development. The firm which was so far into early stage venture funding in India will continue invest in this segment which is typically below $10 million.

These firms are not alone. The PE industry will soon witness a shakeout as the market becomes increasingly tough for fresh investments and fund raising.

“”Today, there is increased competition among investors as the amount of money available with PE firms is much more than the number of companies looking to raise money,”” said Bhasin. While it is easier for established investors with a trackrecord of successful realisations to clinch deals, it takes time for newer players to establish presence, he added. Besides, rising valuations are an issue in India today which are also delaying investments.

In the past three years, around half a dozen PE entrants in the country have shut down their operations. This includes Candover, a UK-based buyout specialist, Strategic Value Partners, Australian investment firm Babcock & Brown, London’s Englefield Capital and South Africa-based FirstRand. They shut shop in India as they failed to make investments in the country following the global financial meltddown of 2008 which led to a slowdown in the sector.

Consulting firm Bain & Company says PE investors are sitting on $20 billion of dry, or un-invested, capital that can be deployed in India. But the escalating sovereign debt crisis in Europe and worsening US economy is depressing the investor sentiment.

“”In today’s globalised world, no country or sector is insulated, and with the current global economic crisis, the industry will go through such sharp cycles,”” said Bala Deshpande, senior managing director at US-based venture capital fund New Enterprise Associates. Since PE firms in India have seen both boom and the slowdown phases, it may take longer for some of them to clinch deals due to high valuations quoted by
entrepreneurs, she added.

Besides, competition among PE firms to raise funds may also prompt some players to shut down their operations. Currently over 120 PE funds are on the road looking to raise about $134 billion. “”Fund raising is a big challenge in this tough market condition as foreign limited partners or LPs are going slow in parking fresh money in the industry, while the domestic pool of funds is not enough for all the firms looking to raise money,”” said Dev Bharat, director at Executive Access India.

Source: Economic Times

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