VC Industry to grow in India: Deloitte

New Delhi: With the improving domestic entrepreneurial environment and favourable investment scenario, the venture capital industry in India and other emerging markets is expected to expand in the next five years, while it may shrink in developed nations, says a survey. According to Deloitte's 2010 Global Venture Capital Survey, the majority of venture capitalists in China, India and Brazil expect the number of venture firms to increase between now and 2015, while 62 per cent of respondents globally expect the number of venture firms to decrease during the same timeframe. The report said that 99 per cent of respondents in China expect the number of venture capital firms to increase in their country in the period under review, followed by Brazil (97 per cent) and India (85 per cent). On the other hand, 92 per cent of venture capitalists in the US anticipate the number of venture capital firms to decline, followed by France... (83 per cent), Israel (80 per cent) and the UK (70 per cent), on account of the unfavourable investment climate and tax policies, difficulty in achieving successful exits and unstable regulatory environment. "The stage has now been set for emerging markets like China, India and Brazil to rise as drivers of innovation, as they are increasingly becoming more competitive with the traditional markets," said Deloitte USA Managing Partner for National Venture Capital Services Mark Jensen. But Jensen maintained that traditionally strong markets like the US and Europe will continue to be important hubs, despite consolidation in the number of venture firms. In India, respondents felt the improving entrepreneurial environment and growing market created a favourable climate for venture capital in the country. Also, the quantity and quality of deal flows will improve significantly, with most expecting an improved or stable environment for valuations. "The current venture capital market reflects strength and confidence, despite... recent challenges. There is renewed optimism, especially for sectors which are driven by strong consumer demand, with India's growth expectancy and growing domestic consumer class being key drivers," Deloitte India Senior Director Rajiv Sundar said. The survey, which measured the opinions of more than 500 venture capitalists worldwide, found that the majority of respondents feel investment levels in clean-tech, healthcare services, biopharmaceuticals, medical devices and equipment and consumer business will increase.

However, there were mixed reactions on telecom, software, electronics and new media. Despite concerns over growth contraction in the US and Europe, 57 per cent of all respondents believe the quantity of deal flows will increase over the next five years and 56 per cent expect the quality to improve as well. This forecast is particularly strong in respondents from China, Brazil and India....

Brighter prospects for private equity in India, but regulatory challenges remain
Deal values in Europe and North America, the epicentres of the global credit crisis, were up 160% and 192%, respectively, from 2009 lows
Sri Rajan, Arpan Sheth & Madhur Singhal

The first year of recovery following the economic downturn has been a good one for private equity (PE). Deal values in Europe and North America, the epicentres of the global credit crisis, were up 160% and 192%, respectively, from 2009 lows. Deal activity has also rebounded in India, following a brief lull in 2009. With the economy growing between 8% and 9% and the consequent increase in corporate funding requirements, transactions look set to continue strongly in the coming year. Its safe to say that PE is now an integral feature of Indias business landscape. The total value of new India PE and venture capital (VC) investments (including infrastructure and real estate) more than doubled to $9.5 billion (Rs42,275 crore today) in 2010 from $4.5 billion the year before. Indeed, India experienced the largest increase in investment activity among major AsiaPacific markets in 2010. Also Read |Investors remain upbeat on deals front Infrastructure will be one of the biggest gainers of private equity Also See | Deals obstacles ( PDF ) Despite its growth and resilience, Indian PE retains two distinctive traits, spelt out in Bain and Co.s India Private Equity Report 2011, produced in collaboration with the Indian Private Equity

and Venture Capital Association (Ivca). First, most Indian promoters are reluctant to cede management control. Related to this is a second long-standing characteristic of PE in India: the relatively small size of the deals. Average deal size in 2010 increased marginally to $24 million from about $21 million in 2009. In line with their small values, 60% of PE deals in 2010 were for minority ownership positions of less than 25%. Still, the prospects look good for Indian PEs continued growth and adaptability in 2011 and beyond. Riding on the back of strong underlying fundamentals, India will retain its status as a favoured investment destination among emerging markets, notwithstanding short-term nervousness that roiled the Indian capital markets earlier this year. In interviews and surveys conducted for the India Private Equity Report 2011, most investors say that the short-term uncertainty and high interest-rate environment present interesting opportunities to acquire assets at favourable prices. About half the respondents report that they expect deal activity to increase by between 25% and 50% or more over the next three years. Almost 35% anticipate growth in the 10% to 25% range. One important barometer of a healthy pipeline in deal activity is the amount of capital looking to be placed with promising Indian firms. Industry watchers estimate that investors have committed at least $20 billion that PE funds are yet to deploy. This dry powder is sufficient to fund nearly all deal activity at 2010 levels for the next two years. PE funds are looking to roughly double the capital earmarked for investments in India, but limited partners (LPs) are becoming more discerning about whom they invest with. The key for PE funds is differentiation, both by demonstrating a proven track record of value creation and by following an investment philosophy grounded in clear investment themes or focused on specific sectors. Fund managers are also deepening their relationships with promoters and other intermediaries to ensure that they will be the partner of choice in the most attractive deals, well before initial term sheets are drafted. One trend helping boost LPs confidence in the Indian PE opportunity is the strong record of exits in 2010. PE funds unwound positions in 120 companies and took in $5.3 billion, the industrys best year so far. Industry experts are bullish about exit prospects through the end of 2011and even more optimistic about the next three years. With the investment and exit environment likely to remain strong, where will PE funds look to do deals? Investments in information technology (IT) and IT-enabled services, long mainstays of Indias growth and PE interest, decreased somewhat in 2010 from 2009 levels. But other sectors, notably energy, banking and financial services, and telecom, saw investment volumes more than double last year. In 2011, banking and financial services, healthcare, infrastructure, and consumer products are likely to attract greater interest. Whether these investments fulfil their potential depends on how promoters select a fund they are willing to work with. If getting peak valuation remains their chief criterion, the role of intermediaries that help match promoters and funds will increase. Given this likely scenario, it is no surprise that respondents to our survey of 50 leading PE and VC funds said that the tough competitive environment is one of the industrys biggest challenges. Further fuelling the

competition among PE funds and driving up valuations has been the emergence of domestic spin-off funds with experienced general partners at the helm. The new funds capitalize on their local market knowledge and strong networks of relationships. Another factor that will influence PEs future in India is the attractiveness of valuations of potential Indian investments compared with those available elsewhere in the region. For example, the double-digit multiples of pre-tax earnings a PE buyer must pay for Indian assets are higher than the single-digit multiples available in other emerging economies, including China. How can PE funds land winning deals amid increasing competition? A good majority of PE funds believe that profit growth, not multiple expansion, will be the key driver of value creation. PE firms that bring operational expertise to the table will enjoy a clear competitive edge. When PE funds are actively involved in the operations of their portfolio companies, they strengthen corporate governance, bring rigour to business systems and processes, assist in raising new rounds of capital, provide access to their business networks, and help fill critical management roles. India has been a difficult market when it comes to collaboration between PE funds and promoters, but the fact that Indian promoters are warming to PE, albeit gradually, is a sign that the PE industry is maturing. More promoters are now beginning to see VC and PE as a credible source of capital with a distinct value proposition rather than as a funder of last resort. For their part, PE funds are reciprocating by enlisting a wider team of advisers and experts and by nurturing a more collaborative relationship with promoters. They aim to have promoters value them as a true business partner committed to their success. PE firms are seeing greater understanding among promoters about the value PE and VC offer. Nearly four out of five are very sure that promoters appreciation for the value PE can add will deepen in the future. PE and VC stand ready to assume a bigger role as growth enablers, but regulatory obstacles remain. For instance, PE funds are impeded by ambiguities about their treatment under Indian securities and tax laws. Regulators can begin to address these by recognizing that PE and VC are a distinct asset class, apart from promoter holdings, creditors and public investors. To attract more foreign direct investment into PE and VC funds, the government also needs to ease current disclosure rules. Ultimately, how far PE funds can go towards fulfilling their value-creation promise depends on PE investors and company owners building a stronger foundation of mutual understanding. One big step forward would be for the two sides to come into closer alignment over asset valuations. Also, while there has been some real progress in post-deal collaboration between PE investors and promoters, there is plenty of room for improvement. As PE in India enters a new phase, its prospects are promising. Whether India realizes the full potential investors see in it as a leading destination for PE and VC capital depends on how these challenges are addressed. Based in Delhi, Sri Rajan is managing director of Bain & Co., India. Arpan Sheth is a Mumbaibased partner and a member of the firms India private equity practice. Madhur Singhal is a manager in the firms Delhi office. Rajan and Singhal are, respectively, the lead author and co-

author of the Bain-Ivca India Private Equity Report 2011.

February 03, 2012, 08:10 PM IST

VCCircle Survey: 12-13 To Be A Good Vintage Year For PE/VC Funds

BY SHRIJA AGRAWAL

About 60 fund managers polled for the VCCircle Survey.

Confidence is a strange thing. It feeds on itself. When everyone is gung-ho, the environment changes to make room for success. We had witnessed this during 2007-08 when record amounts of private equity capital were raised. However, more than the PE fund managers, it was really the benign environment that spelt success for them. By the same yardstick, widespread pessimism is a recipe for failure. For instance, the fundraising environment is challenging right now. Huge dry powder continues to frustrate in a market beset with intense competition. The rupee has plunged. And there is a policy paralysis in New Delhi. All these could add up to impact the current scenario. But we should also remember that even if the GDP growth rate falls to 6.5 per cent, which is possibly a worst case scenario, we are still not doing too badly. The eurozone is tumbling and the recovery in the USA is painfully slow. Moreover, LPs, apparently, go behind the GDP. According to the findings of the VCCircle survey, which has collected responses from 60 Indian GPs 2012-13 will turn out to be a good vintage year for PE/VC investments. In fact, both private equity and venture capital fund managers look set to outpace their deal-making levels of 2011. Much confidence is seen as far as exits are concerned, with fund managers expecting to deliver returns in excess of 25 per cent this year, which might well turn out to be the report card year for a host of these 2007-08 vintage funds as most of them had raised money during that period. Certainly, things are not as bad as they seem. 2012-13 To Be A Good Vintage Year For PE Investments There is a near-unanimity on how 2012-13 will turn out to be in terms of a vintage year for private equity investments. Around 40 GPs with whom VCCircle has spoken believe that 201213 will be a good vintage year for investing. In fact, some of them believe that this specific time span will prove to be a banner vintage. I feel the 2012 vintage of funding will be much more rewarding than the 2008 vintage, said a respondent, with more than $1 billion in assets under management and currently raising a $500 million fund. This is primarily being seen as the outcome of two factors the difficult capital markets bringing in sensible entry valuations and the fact that there will be lesser number of funds participating for deals, as only a few PE funds will have the access to capital and the ability to invest against a backdrop of a difficult fundraising environment.

Ditto for VC fund managers who feel that the crazy valuation scenario is softening and coupled with strong growth fundamentals in near-term, it ensures a good vintage for this year.

(Please click on the arrow below, right, to see all the results).

Faster Pace Of Deal-making In the wake

Verdict to frighten PE firms further

Reghu Balakrishnan / Mumbai Feb 03, 2012, 00:24 IST

Ads by Google Unlisted Company Research : Get accurate financial research on unlisted (private) Indian companies www.probeequityresearch.com While the SC verdict on 2G licences was a blow to the telecom industry, companies such as Bharti Airtel and Idea Cellular, backed by private equity (PE) players, have benefited. Bharti and Idea have investments from Temasek Holdings and Providence Equity Partners, respectively. The shares of Idea went up 2.7 per cent to close at Rs 95.85 on the Bombay Stock Exchange. Bharti Airtel went up 6.9 per cent to close at Rs 385.95. In many ways, the PE rush to India started because of telecom. Warburg Pincus had spotted Bharti in 1999 and six years later, made a billion dollars in profit, making Pulok Prasad and Rajesh Khanna the poster boys of PE. That one investment in many ways made millions sit up and look at PE as an independent asset class for Indian markets.
SOUTHWARD Year 2007 2008 2009 2010 2011 *No. of deals 13 15 7 6 6 Value $3.5 bn $1.4 bn $276 mn $483 mn $50 mn

Subsequently, the sector had witnessed the largest PE investment by a single investor when the Singapore government-owned Temasek Holdings invested about $3 billion in Bharti Airtel in two separate deals in 2007. That year witnessed 13 PE deals, worth $3.5 billion. In 2008, US-based PE major Providence Equity Partners had bought 16 per cent in Aditya Birla Telecom, a wholly-owned subsidiary of Idea Cellular, in a pre-IPO deal. Later, Providence diluted stake and currently holds 9.8 per cent in Idea. Last year, ChrysCapital sold its entire 2.7 per cent stake in Idea for Rs 751 crore and TA Associates sold its five-year pre-IPO investment in Idea, both exiting completely. Later doubts

However, the sector is slowly moving out of PE investors radar. The uncertainties over regulation made the scam-tainted sector the least considered area for such investments in India. Last year, the telecom space witnessed only six deals, worth a mere $50 million, against six deals worth $483 million in 2010. According to Vikram Utamsingh, head-private equity advisory, KPMG India, the complete uncertainty in the sector keeps PE investors away. He said, PE investors prefer transparent and crystal-clear regulations in an industry where they look for investments. Also, investors are not keen for purchasing a mere two per cent stake in leading operators through a large deal. The year 2008 had witnessed 15 deals worth $1.4 billion, according to data from VCCedge. All the six deals in 2011 were in value-added services. According to PE investors, this segment is likely to witness more deals. Says Ajay Relan, founder & managing director, CX Partners and ex-Citi Venture Capital head, Value added services are attractive investment targets due to the small-ticket sizes. Last year, CX Partners had invested $30 million in mobile calling card service provider Matrix Cellular (Inter-national) Services Pvt. Ltd. Outlook A managing director of a US-based PE major, which keeps away from Indian telecom space, said, The potential of investments in voice services is almost over in India. Enough growth has taken place in the space and is getting saturated. Apart from the impasse, regulatory hurdles have given another roadblock for investors. We are just waiting for the opportunities in data services space and will start investing at the right time. According to bankers, proposed deals in telecom tower space are also unlikely to happen in the near future due to the confusion. According to reports, Reliance Communications is in negotiation with PE majors Blackstone and Carlyle to sell its tower unit in a deal worth $3 billion. In the current scenario where so many 2G licenses got cancelled, all investors will take a wait and watch call over the new investments, said an investment banker A few remain optimistic. Shyam Sundar, senior managing firector at IDFC Private Equity, said, The only concern is about the regulations. We expect the telecom regulator can bring more clarity in three-four months over new policies, 3G services and roaming, etc. Also, the companies will be in need for capex once the bid for spectrum begins, causing big-ticket PE investments.