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Pvt capital seeks out small towns

Sukalp Sharma & Sarika Malhotra, New Delhi, The Financial Express

November 28, 2011

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Private equity (PE) and venture capital (VC) investments are increasingly moving towards tier-II and III cities like Pune, Hyderabad and Kochi, bypassing old-time favourites like Delhi, Mumbai and Bangalore.

Sample the increase in size: PE/VC investments notched a staggering 155% increase in tier II cities during January 1-November 3, 2011, with 61 deals worth $1,863.35 million, compared with 47 deals worth $729 million in the corresponding period in 2010. This contrasts the whole of 2010, which saw 56 deals worth $1,020 million in these cities. On the other hand, investments in tier I cities remained almost stagnant at $5,435.47 million with 249 deals in 2011 compared to 272 deals worth $5,339.74 million in 2010.

As per VCCEdge data, Hyderabad with $1,343.7 million in investments is close on the heels of Delhi ($1513.71 million). Other tier II cities dotting the investment landscape are Bhopal with investments worth $164 million, Pune with $132 million, Kochi with $86 million and Indore with $75 million. And even Dehradun clinching a deal worth $30 million.

Gung-ho about the way tier II and III cities are shaping up within India's urban landscape, investors seem keen on scripting a long-haul investment story. “We are observing the emergence of fast-growth regional businesses with national aspirations. We are talking with these companies and finding that many are open to raising outside capital to fund their future growth. We are actively looking at opportunities in consumer, healthcare and financial services,” says Amit Chaturvedy, director, Summit Partners India.

Adds Mohanjit Jolly, MD, Draper Fisher Jurvetson India: “Talent is available in tier-II and III towns. Being outside of a big metro has its advantages. Lower cost of living, better quality of life, less competition for talent and therefore less employee churn are all positives for these towns.”

“Increasing customer base and overall market centred in smaller towns will also give rise to businesses catering to those non-metro markets, and the non-metro customers. And several of those businesses will be domiciled in smaller towns. Relatively speaking, investments in tier II and III towns should rise over the coming years,” says Jolly.

Sanjeev Krishan, executive director, PwC India says that increasingly, funds will travel to local markets. He cites the example of Sequoia Capital headquartered in Bangalore but has specific teams working around mini-metros to tap the business potential in neighbouring towns. “Going ahead, we will see more and more funds with the bandwidth setting up special teams to closely identify opportunities in emerging cities,” he says. Krishnan adds that even investment advisory firms are closely watching these towns for potential businesses in the range of Rs 100-200 crore.

The largest chunk of the investment basket in tier II cities has been grabbed by the industrial sector with $808.21 million in investments. Construction and engineering companies are leading the way within the industrials space. In May, Hyderabad-based Soma Enterprise's Three Highway Projects attracted $200 million from Morgan Stanley Infrastructure Partners, and Bhopal-based Diligent Power got $150 million from Warburg Pincus India. Hyderabad-based KMC Infratech got $111.62 million in March from 3i India Infrastructure Fund.

The other sector in tier II cities attracting investments is diversified financials with $435.71 million this year. The biggest deal of the sector was the $179.87 million investment in Bhartiya Samruddhi Finance in August by a consortium of six investors. At number three is utilities clocking $267 million, followed by consumer discretionary at $138 million and information technology at $82 million.

Going forward, Jolly says that technology companies, will sprout in tier II and III towns: “These include e-commerce and mobile applications companies, and technology-enabled services companies. We at DFJ are seeing increasing number of plans come from Chandigarh, Indore and Ahmedabad”.

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