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A tightening of global liquidity markets has made private equity fund raising for the real estate and infrastructure sectors difficult with many funds expected to extend their closures or reduce the target corpus. According to people in the industry, the churn in the global equity markets has made investors wary of even private equity funds, although the two markets are in different categories with different quantum of risks. […] The Indian outsourcing sector is amongst the worst hit by the rising rupee with most of the companies showing a slump in growth and profitability. Valuations too have fallen. However, this situation not only reflects the ‘deteriorated revenue growth expectation’ of investors, but also makes the domestic BPO (business process outsourcing) space ripe for heightened M&A (merger and acquisition) activity. […] The bearish market may have made retail investors cautious, but it has encouraged private equity funds queue up to invest in Indian companies, as it helps them leverage a reasonable valuation. In a bullish market, companies wanting to raise funds through private equity placement commanded an exaggerated valuation. But they cannot do so now, in light of the weak sentiment. However, this has made international equity fund houses, which had adopted a 'wait & watch' policy, keen on investing in the same companies. According to Sunil Shirole, managing director and CEO, YEN Management Consultants, around 360 foreign private equity funds (registered with SEBI) have accumulated a whopping $60 billion with their onshore offices to invest in Indian private companies. Other international PE houses are also warming up to invest in India through the automatic FDI route. […] Private equity (PE) funds have been increasingly focusing on Indian private sector banks, as the 2009 deadline for further liberalisation in the sector comes closer. PE funds have picked up stakes of about 5% in various banks such as Yes Bank, Catholic Syrian Bank, Dhanalakshmi Bank and Federal Bank. In certain cases, a consortium of PE funds has picked up stakes of up to 15% in banks including Catholic Syrian Bank. Industry sources said though the sector was highly regulated with stringent rules by the Reserve Bank of India at present, it is expected to open up post-2009. RBI is set to revisit the regulatory frameworks, guiding the sector after 2009 and take a decision on whether it can be further opened up to foreign players. Analysts pointed out that these banks would be the first to be gobbled up by foreign banks, once the sector is opened up. “Some of these banks are concentrated only in certain areas and naturally they would also want to expand and it would make sense for them to look for either buyers or at least to enter into joint ventures,” an industry expert said, adding that investments by PE funds would also have an impact on the valuation of these banks. […] Industry experts say unlike in the past when term sheets were signed in six-seven days, the duration has now increased to a month. Fund managers are taking a longer time to make up their minds on investments. They are also agonizing over what valuations ought to be. Some are even backing out of deals. For instance, Indivision, a part of the Future Group backed out of an impending deal with DishTV after signing the term sheet. Sources said, this was because valuations were driven down. Then, sources added, there is the case of General Atlantic Partners backing out of Essar Power, once again, after signing the term sheet. Also, some firms are moving away from plain equity deals to structured ones to protect itself from the market downside. Not just that, they have started to ask for collateral on their investments. Also, the return expectations from high yield structured deals have gone up from 15-18% to 20-25%, a banker explained. […] The volume of private equity (PE) deals in India is down by 47% in the first 10 weeks of 2008 over the year-ago period, but buyers say they are expecting cash-hungry companies with sharply lower valuations to line up in front of investors following severe declines in stock markets. They say that deal activity will pick up in the next two-six months. Until December, India’s capital markets had been a big competitor to PE. But, now, the capital market option has contracted sharply, stalling plans by many companies to raise funds. While it rose on Tuesday, the Sensex, the benchmark index of the Bombay Stock Exchange, has fallen about 27% since the beginning of 2008. In 2007, it had risen by 47%. […] Private equity and overseas venture capital investments in Indian Companies could soon be included in foreign direct investment (FDI) caps for each sector. That’s the proposal of Reserve Bank of India (RBI) in a draft paper issued on Monday, which includes several new entities under the definition of FDI. If implemented, it would be another major step to monitor the flow of foreign capital into the country. The broadening of the class of investors under FDI nomenclature comes at a time when there is growing debate over the role of sovereign wealth funds and the influence they wield on economies, globally. […] Apparently hit by poor market sentiment, India has seen at least 14 major private equity deals fall through in the last three months with three big ones falling through in the last 30 days. The total number of private equity deals in February 2008 was 55 per cent lower than in January 2008. With the market in doldrums and valuation of companies looking stretched, financiers are walking away from deals struck in the better days of December. Hitesh Agrawal, who heads the equity research at Mumbai-based brokerage firm, Angel Broking said, “Globally, there is a liquidity crunch. In a post-sub-prime scenario, private equity players are more answerable to their investors, making it tough for a fund manager to select his investments and at the correct valuation.” […] The sharp correction in prices of listed equities has already had its impact in the private equity space. A few large deals have fallen through since the market crash, with the most noteworthy being ICICI Ventures’ plan to invest $800 million (Rs3,240 crore) in Jaypee Infratech Ltd for a 10-15% stake. Earlier, Indivision India Partners, the private equity fund of the Future Group, called off a Rs250 crore deal with Zee group’s Dish TV. By and large, private equity deals have fallen through because investors toned down their valuation estimates in line with the drop in prices of listed peers, while promoters stuck to earlier estimates, based on the assumption that the fall in the stock markets is only a temporary phenomenon that will correct over time. […] Sometime last year, the monetary policy authority wrote to the Government and the capital markets regulator indicating its uneasiness with private equity flows. In the overall hierarchy of flows, the Central bank places private equity well below other forms of capital such as remittances and foreign direct investment. In fact, it has said that the classification of private equity flows would have to be looked at closely considering that in some cases, investors had exited quickly without staying on even for the medium term. These concerns and estimates of private equity investments topping $10 billion in 2007 had prompted the Government to write to SEBI. The finance ministry wanted the regulator to collect data relating to investments by private equity funds and based on that, to ascertain whether there were any regulatory concerns. The aim was to revisit the issue after an analysis. But private equity fund managers here who were fretting at the thought of being policed, need not worry at least in the near term. For, the capital markets regulator has made it clear that it is not equipped to collect the data on private equity. Rather, the Central bank, which monitors all inflows and outflows, is far better positioned to carry out this task, it has said. Since private equity could come in several forms, such as through foreign venture capital funds, it has been suggested that the RBI could be mandated to track these flows. […] |