India building up to another PE wave
• New fund raise and deployment would typically take about 12-18 months • Increasing flexibility provided by the investors to their investees regarding use of invested funds • Entrepreneurs and promoters in tier II and tier III towns have been reaching out to PE
New Delhi, November 26, 2014: Private Equity (PE) players have told Deloitte India that their appetite would continue to be directed towards companies that benefit from the strength of domestic consumption. Potential beneficiary segments include e-commerce, small retail, agriculture, healthcare, financial services, education and media & entertainment. Limited Partners (LPs) are also revisiting their India investment outlook, more so, buoyed by a rising stock market and increased acceptability by Indian promoters.
Analysing the PE activity over the last few years and topped up with the views of select private equity players Deloitte India released a paper titled ‘The build-up to another PE wave’ in association with ASSOCHAM and Private Equity & Venture Capital Association of India (PEVCAI). Participants shared in discussion with Deloitte on their perspective on the current investment climate and expectations for the near future.
Besides consumer-driven plays, government’s policy initiatives emphasising on areas such as development of smart cities, high speed rail connectivity, food processing & agro industry (including cold chain) and clean energy are expected to generate ‘excitement’ across industry sectors and geographies.
“Growing domestic consumption, results of the recently concluded general elections that gave stability at the Center and declining global commodity prices has created a trifecta to position India once again as one of the top investment destinations in the world. As business sentiment improves, the stock market too has seen a gain of over 25% (1 January to 30 September, 2014). This would be beneficial in creating conditions for exits in the coming years”, said Kalpana Jain, Senior Director, Deloitte India.
The sentiment of this trifecta is reflected in resurgence in deal activity. Deal value in 2013 saw approximately USD 8.5 billion worth of private equity deals across 410 deals while 2014 has recorded approximately USD 8 billion invested in 460 deals till September 2014. Average deal value remained in a similar range between USD 20 million to USD 25 million in 2013 and 2014, due to a few large deals.
Given that money is needed for core infrastructure development, the investing community is of the opinion that although it may take time, investment in backbone sectors such as infrastructure, education, healthcare and renewables will continue to see more traction as government policies take effect on ground. So far there have been 10 deals representing a PE investment inflow of approximately USD 3.4 billion primarily as minority stake in investee companies. In addition to traditional PE investors, non-traditional equity investors such as SoftBank and Canada Pension Plan Investment Board have shown interest in Indian assets.
Industry Sector trends
Apart from e-commerce and core sector, Healthcare and pharmaceuticals continue to be an avenue for PE investments into the country. Between 2013 and September 2014, PE investments of approximately USD 1.8 billion were made in segments such as single-specialty hospital chains, diagnostic chains and medical device manufacturers.
The banking & financial services sector has attracted approximately USD 1.5 billion over the past two years because of its potential to make inroads into rural areas and invest in new banks that do not have legacy issues. Easing Foreign Direct Investment (FDI) norms and prevalence of revenue generating assets attracted investments in the real estate and construction sector in 2013 and 2014 at a total investment of around USD 1.3 billion of equity inflows.
An emerging trend is the increasing flexibility provided by the investors to their investees regarding use of invested funds. Recent transactions are indicative of funds being provided to companies for scaling up through inorganic route especially in the e-commerce space. Based on discussions with investors, the sweet spot for equity investment is expected to continue to be minority stake.
In line with precedence, 2013 and 2014 have seen approximately 65%-75% investments occurring in the large metro such as Bengaluru, Mumbai, Chennai, Delhi and Kolkata. While PE investments in Kolkata were lowest, the number of investments going into that metro has seen an up-tick. Investments in south and west India remained robust supported by concentration of IT/ITeS companies in the south and pharmaceutical industry in the west.
Respondents mentioned the growing ease of access and connect with companies in tier II and III cities. Entrepreneurs and promoters in tier II and tier III towns have been reaching out to PE investors through their professional or personal networks.
Holding and Exit
PE investors are of the view that the immediate and near future is likely to see an increase in exit transactions returning average holding periods to 3-5 years instead of the current 5-7 years.
Investors highlight that the competitive play would depend on exit landscape in the coming years. New fund raise and deployment would typically take about 12-18 months. PEs and strategic players would play a competitive role in investing in valuable companies driving up valuations.
Note to Editor
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In this press release, Deloitte India refers to Deloitte Touch Tohmatsu Limited.
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