VCs, PE investors go slower in 2008; look to rebound in '09

Global economic slowdown hit them too in 2008, but private equity and venture capital investors -- who usually help shape new business ideas -- are looking to bounce back in 2009 by capitalising on the dearth of traditional fund-raising routes such as IPOs and debts.

Indian entrepreneurs received a significant $11.3 billion of PE and VC investments in 2008, but it was still lower by about a quarter from close to $15 billion in 2007.

After a subdued year, the investors and market experts are expecting the PE and VC investments to pick up next year as raising debts have become costlier and IPOs are not finding any takers and the dampened investor sentiments might finally start improving on the back of efforts made by the government.

According to Venture Intelligence, a research firm tracking PE and VC investments, there have been 382 private equity deals worth $10.6 billion this year, as against 439 deals worth $14.1 billion in 2007.

At the same time, VC investments into Indian firms have declined to $733 million with 122 deals so far this year, from 142 deals worth $874 million in 2007.

It was PE/VC investments that shaped start-ups like Google, Yahoo! and Facebook into what they are today, and these are the investors who park funds in business ideas that sound like growth opportunities of the future.

Companies need such investments at various stages of their businesses -- angel investors provide the seed capital, while early-stage investors come in when a core team and a business idea are in place and operations are being started.

Besides, some established companies also get such investments in the form of private equity placement or strategic stake sale.

"There definitely has been moderation in deal values as well as number of deals which have happened in 2008 as compared to 2007," PricewaterhouseCoopers' Transactions Group executive director/partner Sanjeev Krishan said.

"Government measures as well loss of other avenues like IPO and costlier debt might lead to increased deal volumes in 2009," he added.

Blaming the negative returns from their investments for the decline in deal flow, Jagannadham Thunuguntla, equity head Nexgen Capital, the merchant-banking arm of brokerage firm SMC Global said, "The high volumes of private equity investments in 2006-2007 started to yield negative returns of as much as 67 per cent in 2008."

"Because of this many private equity fund managers went on a defensive mood besides foreign funds were under severe cash redemption pressure," he noted.

Venture Intelligence CEO Arun Natarajan said that the moderation in PE activity was largely because of the negative sentiment across both the entrepreneur and investor community, which in turn was due to the global economic turmoil.

While a recovery is expected to begin in the first half of 2009, it might take longer to return to the peak investment levels of 2007," Natarajan noted.

Some experts are anticipating 2009 to be a much better year if the global economic scenario stabilises and also due to the attractive valuations available currently.

Consultancy firm KPMG's head of Private Equity Group, Vikram Utamsingh, said, "The next year is expected to be a good year for PE deals and most likely it would be better than 2008.

"There would be mainly large-size transactions and most of the deals are likely to be targeted towards those sectors that are driven by domestic demand such as -- infrastructure, logistics, healthcare and education among others."

The cash-rich PE funds are at present in an advantageous position as they can buy into many companies at their low valuations, both in the listed as well as unlisted space.

Consultancy major Grant Thornton's specialist advisory services partner C G Srividya said, "PE investments have marginally picked up in November 2008 from October 2008. We expect the same levels of activity to continue in the near term and a reasonable increase in investments in the medium to long run."

PwC's Krishan argues, "If India has to grow at a reasonable level, public investments alone cannot fund all the growth and private growth capital is going to be an important financing vehicle.

"However, unless the valuation expectations become reasonable, particularly in the private domain, PE investments may continue to be muted."

Notwithstanding the fact that the global financial crisis is directly affecting banking system and financial markets in India, its economic growth is still being projected at over seven per cent, which is impressive in the backdrop of world's major economies falling into recession.

"The overall impact has been quite less. India is a domestic consumption and investment-driven market, and while service exports are a significant part, we are not as dependent on exports, as for example China is," Krishan said.

Encouraged by a relatively better trend in the VC investments, which have declined by about 12 per cent this year, market observers believe that more venture capitalists could put their money into Indian firms, particularly those in the high-growth sectors.

In 2008, advertising/marketing start-ups ruled the roost with 37 per cent share of total VC investment, followed by the IT space where there was a 55 per cent fall in deal value as compared to same period in 2007.

The same trend is expected to continue in 2009 as well, with lot of growth still expected in the advertising and media sector.

IT/BPO firms providing cost containment options to BFSI and manufacturing sector would also be sectors to watch out for, the experts believe.