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Private equity investors bet big on Indian SMEs

Poised to invest Rs 24,415 crore in smaller enterprises

Small and Medium Enterprises (SMEs), to which most banks are chary of lending, are being actively wooed by private equity (PE) investors. According to industry representatives around 70 per cent of the PE investment that came into India last year was invested in SMEs.

PE funds are poised to invest an estimated Rs 24,415 crore ($5 billion) in Indian SMEs, they added. In the PE context, companies with revenues in the Rs 50-500 crore range have been categorised as SMEs.

SMEs are typically promoter-or individual-driven and, in many cases, are led by first-generation entrepreneurs. Many of these companies are very competitive and have, over the last few years, capitalised on opportunities that have presented themselves.

According to a World Bank report, India has 13 million SMEs in the manufacturing and services sector. One of the greatest challenges for them is the current credit crunch.

The sector has traditionally depended on bank loans, but bankers have curtailed lending to SMEs due to the greater risk of non-performing assets (NPAs) in a downturn. Moreover, large firms that raise funds through both the capital market and banks have turned increasingly to banks, ever since the capital market crashed at the beginning of 2008 — thereby offering banks a line of business that is more lucrative than lending to SMEs, said the World Bank report.

“Their (SMEs’) access to funding has been constrained, which is affecting their ability to invest in capital goods, environmentally friendly technologies, and job creation,” the report added. The bank recently provided additional financing of Rs 1,953 crore ($400 million) to India’s SMEs.

Seeing the opportunity, in the late 1990s, PE funds started investing in Indian firms. Some of the early entrants, including ICICI Venture, UTI Ventures and ChrysCapital, have built companies. This raised the interest of entrepreneurs in private equity as a source of capital and established India as a strong PE destination.

For the period January 2008 to July 2009, seven investors — Kotak PE, Aureos, BTS India, Zephyr Peacock, Lighthouse, VenturEast and SIDBI Venture — have done 33 deals worth about Rs 937.5 crore ( $192 million), according to Arun Natarajan, chief executive officer of Venture Intelligence, a research service focused on private equity and mergers and acquisitions.

These investments will not address the credit problems of SMEs, but will bring them some relief, said Natarajan. He said that PE companies are focused on finding a company early, adding value to them and making an exit at a later stage. They are stable sources of capital and tend to have an investment horizon of 3-5 years with three times return on the investment.

“They not only bring the money, but also their expertise and experience from the global markets and they work extensively with their portfolio companies and encourage management to undertake operational improvements in case of any strategic opportunities such as mergers, acquisitions and joint ventures,” he added.

PE funds help in the valuation process, negotiations, due diligence and transaction structure, since they tend to have strong relationships with investment bankers, consultants and advisors, added K Srinivas, BTS India’s Managing Partner. His company has exhausted its Rs 488 crore ($100 million) fund and launched a second fund which is valued at Rs 366 crore ($75 million). Both funds aimed to support SMEs in India.

Company Investor Amount (US$ million) Date
Continental Warehousing Aureos India,
ePlanet Ventures
16 Aug-2009
Si2 Microsystems JAFCO Asia, VenturEast 12 Feb-2009
Rubicon Research Kotak PE 8 Feb-2008
BVG India Kotak PE 7.5 Feb-2008
Sai Sudhir Infrastructure BTS India 7 Sep-2008
HHV Solar Aureoa India, SIDBI VC 7 Mar-2008
Anabond SIDBI VC 7 Jan-2008
Caravel Logistics BTS India 5 Jul-2009
Miles Software Zephyr Peacock 5 Jun-2008
Words Infocom Lighthouse 5 Jun-2008
Source: Venture Intelligence

So far BTS India has invested in some 26 companies. In the SME sector pharma, information technology/ IT enabled Services (IT/ITeS) and infrastructure are giving consistent returns. “It’s a cycle. Between 1997 and 2000 the textiles industry was giving good returns, then between 2000 and 2005 it was automobiles, and now its pharma, IT/ITeS and infrastructure. Growth in infrastructure alone is around 150 per cent,” said Srinivas.

Natarajan said that PE investors stayed with a particular company for a minimum of three years and a maximum of five years. Preference was given to sectors with a domestic focus and expected a three-fold return on investment. Some sectors that are fast picking up are infrastructure, education, health care and food and beverages, among others, he added.

Source: Business Standard

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