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Entrepreneurial culture is the key

 Though a relatively young industry, the Indian private equity (PE) industry is witnessing an unprecedented growth on the back of a growing economy. Currently one of the fastest growing markets in the world, the Indian PE industry, which took off with the IT and outsourcing boom, is now witnessing large investments across various sectors – manufacturing, engineering, services, lifesciences, retail and infrastructure.

PE investment in India was estimated to be $ 7.46 billion in 2006 compared to $0.55 billion in 2002, a CAGR of around 100% over a 4-year period – a heady growth for any industry. The continued high economic growth, greater global integration and opening up of some of the key sectors of the economy such as infrastructure, retail, aviation, etc has attracted large foreign PE players to India. India has now emerged as a highly attractive investment destination for foreign PE players as it offers a diversified set of investment opportunities with potential for high returns.

Till a decade ago, Indian industry was largely relying upon institutional financing for both debt and risk capital. However, over the years, the PE industry emerged as an alternative funding route due to factors such as large unmet demand for growth capital owing to strong industrial growth, robust domestic demand for goods and services and growing prosperity which has created a cascade of demand in key industries such as retail, entertainment, healthcare etc. On the other hand India’s growing recognition as a high-quality, low-cost manufacturing and research & development destination gave further impetus to economic growth by way of huge outsourcing opportunities from the global players. A combination of outsourcing opportunities from exports with internal domestic consumption driven demand for goods and services has opened up new investment opportunities for the PE industry. While PE investments during the early years were restricted to knowledge / services based industry such as IT, ITES and life science, investments are now been made across various sectors.

While the opportunities for investments have significantly broadened for the PE industry, concurrently it has also achieved the status of an alternative asset class with sustainable returns over the last five years which is reflected by some of the successful exits achieved in recent years and good returns earned by private equity firms.

Behind all these developments lies the subtle but very important change agent which is the entrepreneurial culture itself. The growth in the entrepreneurial culture, thanks to the success of the IT sector, has seen the evolution of professional entrepreneurs who were able and willing to embrace global corporate governance standards as a way of building investors’ wealth. This has brought in an entirely new entrepreneurial culture of transparency and management style imbibing the global corporate governance standards which are the fundamental attributes required for any PE fund investment.

All these factors undoubtedly bolstered the confidence of global PE players to enter the Indian market in a large way during the last 3 to 4 years. Indian PE industry has seen entry of almost all the global PE players setting up either India dedicated funds or significant allocations to India from their global funds.

Going forward, some of the growth areas for PE industry would be infrastructure and infrastructure-related services and the small and medium enterprises segment. To sustain the present economic growth, the state of infrastructure in terms of roads, industrial parks, real estate, airports, sea ports etc needs to be upgraded significantly and would require billions of dollars. The Government of India proactively helped create an Infrastructure Fund of $ 7 billion with active participation from various global and Indian PE funds. In addition, a number of global PE players set up dedicated infrastructure and real estate funds.

For any economy, the small and medium enterprises (SME) sector play an important role in sustaining overall growth and development. This is more so for a growing economy like India. The SME sector constitutes more than 95% of industrial units in India and contributes 40% of the output. One of the major hindrances for growth of the SME sector in India has been the lack of timely infusion of growth capital.

The sustained economic growth during the last five years coupled with opening up of global outsourcing opportunities in favour of India and booming consumerism in the domestic market have propelled the SME sector in India. A large number of SMEs have witnessed growth rates in the range of 50 – 100% every year. Even to sustain these growth rates, these companies need to invest in capital expenditure and set up expansion projects for which there is a significant need for growth capital. Although debt is available at competitive rates, most of the SMEs tend to operate at high gearing limiting their ability to raise fresh debt. Most of the SMEs are set up by the professionals with limited personal resources to meet the growth capital requirements.

In the past, most of the PE players overlooked this segment mainly due to the limited exit options from such investments. However, with the development of capital markets and especially maturing IPO markets and concurrent development of M&A segment, the exit options for PE players in this segment improved significantly and as a result, the SME sector has become one of the focus areas for not only Indian PE firms but also some of the global PE firms. With projected GDP growth rates of 7-8%, the SME sector is expected to attract significant attention from the PE industry. This could further improve if the government takes a proactive approach for development of SME sector by including SME segment in the list of specified areas under Section 10(23FB) of the Income Tax Act for according tax pass-through benefit.

Source : Financial Express

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