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PE investments rise 41% to a 4-year high in 2011

Deepti Chaudhary, Mumbai, Mint

January 04, 2012

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Private equity (PE) and venture capital (VC) investments in India rose 41% in 2011 over the previous year- the highest since 2007 - as a sluggish capital market and costlier debt led Indian companies to approach these investors for fresh funds.

Last year saw 427 PE/VC deals worth $11.2 billion (around Rs59,500 crore today), compared with 328 investments worth $7.96 billion in 2010, according to data from research and financial consulting firm Four-S Services Pvt. Ltd.

Experts say the deal momentum will persist this year as capital markets continue to disappoint and dry up the initial public offering (IPO) window and because the interest rates hikes in 2011 made debt costlier.

Sectors such as manufacturing, renewable energy, clean technology and urban infrastructure projects are expected to see an increase in investments this year.

Yet, the total deal value will remain way behind the $20 billion-mark achieved in 2007. Investors are not so bullish any more and are beginning to question the viability of Indian market for returns and exits, Ajay Jindal, executive director, Four-S Services, said by phone.

There were 30 large-ticket deals-above $100 million in value - in 2011 worth $5.91 billion (or 53% of the total investments) compared with 19 deals worth $3.46 billion in 2010, according to the Four-S Services report released on Wednesday.

"The number of VC/PE deals and amount invested could increase this year. It's premature to predict large-ticket deals, but they could decrease as investors are getting concerned about the power and infrastructure space," said Jindal.

Infrastructure and power topped the chart in 2011, accounting for 27.8% of the investments with a deal value of $3.11 billion.

Last year, however, was not good for PE exits.

Against the backdrop of a difficult public market, PE exit volume in 2011 fell 35% over the previous year to 80 deals and the value dropped 49% to $2.69 billion. In 2010, there were 124 exit transactions worth $5.3 billion on the back of robust capital markets. Fund managers, unable to match their exit timing with desired returns, are now holding back their portfolios.

Experts say while the sentiment around both investments and exits is not positive, the situation could change later this year if the capital markets turn around.

According to Ambit Capital, the Indian equity market could improve from March following an anticipated reversal in the Reserve Bank of India's (RBI) tight monetary policy stance, significant monetary easing in the West and more decisive and reformist policies from the government. On a 12-month basis, Ambit Capital sees the Sensex moving towards the 18,000 points level.

"Exits are under way. It's just a question of how many of them will consummate. We expect a positive turn in the market in the last half of this year, which, in turn, will have a positive influence on both deal-making and exits," said Vikram Hosangady, head of transaction services at consulting firm KPMG India.

Incidentally, more PE investment is expected in public equities. "In 2012, we will see higher asset allocation from private equity firms into public markets through secondaries or QIPs (qualified institutional placements). We believe public/listed investments are a good universe to look in India," said Ranu Vohra, co-founder, managing director and chief executive officer, Avendus Capital, adding that public entities are often valued cheaper than private companies.

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