Experts forecast $20 bn investment in 2008 : ET

Simply put, a relatively new
segment of investors have entered the scene and have pumped in Rs 55,000 crore
into Indian companies. Ask any investment banker, and he will call the year 2007
a watershed year as all mandates for fund raising were completed and he is on
track to receive a hefty bonus.

Shift in
focus

Clearly there was a
shift in focus among investors from outsourced based investments to domestic
consumption-led investments. As a result, 2007 saw large-scale investment in
infrastructure, financial services and to a limited extent internet based
companies focusing on Indian markets.

Which is one of the reasons
why sectors like infotech, auto components and textiles, which were the centre
stage for PE investments in previous years, saw a near neglect this year. The
problem for these export-oriented sectors started with the rising Rupee which
hit their profit margins.

“During 2007, PE
investors focused their attention squarely on companies that benefit from
domestic consumer spending and infrastructure investments,” says Arun
Natarajan, founder & CEO of Venture Intelligence, a research service focused
on private equity and venture capital activity.

C Venkat Subramanyam, founder
director of Veda Corporate Advisors, concurs with this view. “Clearly the
flavour today is on companies which concentrate on Indian markets.
Outsourcing-led investments are very limited,” he adds.

Rising
stock prices

The flourishing
stock markets have aided this investment boom sweeping the country. “The
stock price rise actually enabled funds to raise monies easily. Selling India
story outside to raise funds was made easier thanks to the rising sensex,”
says a fund manager.

But stock
price rise also had its flip side. Deals were getting closed at exorbitantly
high valuation. “There was an irrational exuberance in 2007. Deals which
should have normally closed at 10 times price earnings got closed at 30 times.
Too much money is chasing a single deal. For the first time we saw the entry of
auctioning of transactions,” says Nitin Deshmukh, CEO of Kotak VF.

A number of PE investors who
invested in prior years made profitable exits. “They either exited through
an IPO or a trade sale or through sale to other funds,” adds Venkat
Subramanyam.

Rise of
infrastructure sector

A major
beneficiary of fund flow has been the infrastructure sector. Clearly, the
growing necessity for the country for quality power, roads, ports and such saw
huge monies flow in. “A chunk of investments were absorbed by this sector,
and the beauty is that it needs more and more money,” says K Ramkumar,
regional head, south, Religare Securities.

All these success stories
revolve around the macro-level feel good factor that is sweeping the country.
Even entities which were hitherto slow to react to catch the bus have become
nimble footed.

“Take the
case of upcoming Bangalore Airport. This place and city centre needs to be
connected and the Karnataka government is toying with the idea of a private
public partnership (PPP) model and raise funds from PE investors,” says K
E C Rajakumar, UTI Venture Fund’s CEO.

Blurring
of lines

With increased
liquidity in the system, the lines of demarcation between hedge funds and PE
investors became very blurred. “With sovereign funds Temasek, Dubai
Investment Corporation and the like doing PE deals, the lines of demarcation
between hedge and PE funds are getting blurred,” says Subbu Subramanyam,
of Barings Private Equity partners.

Hedge funds like DE Shaw, New
Vernon and Och Ziff are making private equity investments. “This only goes
to show that it is important to have flexible capital, rather than fix it for a
specific purpose,” says Tariq Ahmed of Blue River Capital.

Innovation

To attract investments,
promoters innovated a great deal. Cellphone companies hived off their tower
business to raise funds, pharma companies spun off their research divisions and
attracted investors, automobile dealers separated sales and service to get
funds.

Retail sector, which is
amongst the hottest sectors in the country, too saw innovation where the front,
and backend were separated with monies getting raised at the back-end alone, as
current laws forbids foreign investments in multi-brand retail totally.

Welcome
2008

Will the forthcoming year
spring surprises? A cross-section of the industry does not seem to think so.
“The current momentum would continue and would get bettered. We forecast
2008 to see $20 billion worth investment,” Rajakumar says. The consensus
is that entrepreneurs in Tier II and Tier III would jump onto the PE bandwagon
when they open up their businesses for external investors.