Increasing enthusiasms for globalization coupled with government initiatives for further liberalisation of its regulatory environment towards private investments, have inspired 40 US Venture Capitalists (VCs) and Private Equity holders (PEs) to raise capital to the extent of US$ 400mn to place it heavily in start ups companies in India, according to joint study undertaken by Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Ernst & Young.
The Study on `Indian PE/VC Market Firing on all Cylinders – Liquidity all round’ has concluded that VCs such as Intel, CISCO, Motorola, Sequioa Capital, Oak Investment Partners, Matrix Partners, Trident Capital, Sherpalo Ventures, Bessemer Venture, Walden International, Canaan Partners, International Finance Corporation, Norwest Venture, Gabriel Venture, Draper Fisher Jurvetson have successfully generated US$400mn to invest in India as its market has developed appetite for innovations and entrepreneurship across various industry verticals. PEs conglomerates comprise Warbugs Pircus, General Atlantic, Carlyle, 3I, Temasek, Kohlberg Kravis Roberts, Blackstone, Goldman Sachs, Providence Equity, Macquire and Francisco Partners.
ASSOCHAM and E&Y have jointly forecast that the number of such VCs would more than double in US alone and multiply many fold among the economies of scale for India in the year 2007 and 2008 as corporate, private equity holders and VCs across the globe are growing enthusiastic to invest in India to realize the potential of its booming financial markets.
Releasing the Study, President ASSOCHAM, Venugopal N. Dhoot said that total PE/VC investment in India reached a record high of US$ 7.5 billion in 2006 as compared to US$ 2.2bn in 2005. As a matter of fact, the first 3 months of 2007, i.e. January, February, March PE & VCs activities worth US$ 2.4bn came into effect in India through across 78 deals.
The overall level of PE/VC deal activity is even more telling if one takes into consideration that in comparison with the more mature US and European markets, the level of PE activity, mainly on account of very modest Buy-Out volumes, is still modest leaving significant room for further growth. During 2006 Buy-Outs accounted for only 5% of total number of transactions and 15% of overall transaction value whereas in mature Western Markets Buy-Outs typically account for 75% – 80% of overall transactions value and combined PE/VC funds raised. Obviously this is partially driven by the rapid pace of development of the Indian economy, creating amble growth opportunities for early / mid stage ventures and late stage development capital.
However, it is also partially driven by regulatory aspects (e.g. cumbersome delisting regulations) as a result of which conducting public to private transactions is not easy. Furthermore in Western markets Buy-Outs funds typically raise any where between 50-80% of the overall deal value in the form of loans (“leveraged finance”), which is secured against the targets balance sheet.
On evaluation of PE/VC in India, the study points out that the history of Private Equity and Venture Capital industry in India entwined with the liberalization of the country’s economy, which began in 1980’s but gained significant momentum in 1991. Until the mid 1990s, largely development finance institutions such as IDBI, ICICI and IFCI met the need for private equity.
It also points out that several foreign PE/VC firms such as Warburg Pincus, CDC Capital, Baring Private Equity Partners, Draper International, HSBC Private Equity entered the country. The PE/VC activity roughly started in 1996-97 and gained momentum in 1999 and 2000, on account of overall boom in Information technology, Telecom and Internet sector.
As a result of economic recession in US and slowdown in technology sector, many of the PE/VC funds started towards the end of the nineties closed down their India operation during this time period. The remaining funds started to invest smaller amounts of money in more mature companies in order to minimize risk. This trend continued up till 2003.
On account of sustained GDP growth of 8-9% on a yoy basis and high growth momentum in certain sectors such as Information technology, Telecom , high end manufacturing, pharma, retail and financial services international investors renewed their interest back in India. As shown in the figure below, after 2000 there has been a continuous up tick in the total value of investments in India. Investments of US$ 1.67bn in 2004 surpassed the previous high of US$ 1.16bn in 2000. These investments reached US$ 2.2bn in 2005 thus showing a growth of 38% on a y-o-y basis. However the real quantum leap came in 2006, which saw a record investment of US$ 7.5bn, thus showing a growth of around 300% over the previous year.
Source : India Infoline