From being a darling country for private equity investments (during 2003 – 08), India has been downgraded to a much less attractive destination for General Partners (GP’s) as well as Limited Partners (LP’s) of private equity funds over the 2009 – 12 period. A recent study from VCCEdge reveals that out of the reported 500 – 600 private equity/venture capital (PE/VC) funds operating in India, only
192 funds have made more than one fresh investment in India since January 2009. This corresponds with a period of bottomed-out valuations of public firms in India which should have arguably driven up the volume of private equity. The same report highlights that PE/VC deals worth $10.9 billion were struck in India in the year 2011, which is significantly lower than the $28 billion of PE/VC investments in China in the same period. It is also recently reported by Business Week (quoting Brazilian Association of Private Equity and Venture Capital) that Brazil’s PE/VC industry has also overtaken India in fund raising and is expected to grow by more than 20 percent this year and that countries like Indonesia (on the back of its rich natural resources and need to boost infrastructure) are quickly lining up funds. Such developments gain credence against a backdrop when India is seen as the first of so-called BRIC economies to lose its investment-grade status (from S&P), only adding to the negativity already created by slowing GDP growth and political roadblocks. While confidence among LP’s or institutional investors pouring money into Asian private equities strengthened as outperforming returns owing to a buoyant China and higher growth encouraged outlook for further allocation, India has seen a shrinkage of availability of those funds - of more than 50 PE funds trying to raise money in India over the last 2-3 years, only a handful of them have been successful, while most others have discontinued their fund raising efforts. One of the main reasons cited by LP’s is that India has shown poor returns compared to other emerging Asian economies. For example, India recorded a poor 9.9 per cent internal rate of return (IRR) or 1.4x multiple of money compared with China's 21.8 per cent or 2.1x at the end of June 2011 (South Korea at 13.6 per cent or 1.6x for the same period). While the rhetoric around global economic uncertainties, Euro countries debt issues, slowing Indian GDP growth, lack of political will for reforms, high inflation, higher than comfortable fiscal deficit (and impending ratings downgrade) has gone up; it cannot be denied that an economy of India’s size is still growing at 6 – 7 per cent. Some large sectors like automotive, pharmaceuticals, FMCG are showing in excess of 20% growth in revenues and profits, largely driven by growing domestic demand. Additionally, valuations of Indian stocks (and private companies allegedly) are at attractive levels and Indian companies are amenable to accepting private equity capital at reasonable terms.
