The flow of Private Equity (PE) fund into India marks the dawn of a new era. It just goes to exhibit the robustness in the domestic market, which till about a couple of years ago was an uncertain story to narrate. For all these years companies typically chose the IPO route. The larger players also explored placing their debt domestically as well as abroad.
Here’s a new beginning – the way in which capital was raised has worn a new facade. PE fund is the new buzzword with corporates whether large or small. What’s important to note is that there is a change in the mindset amongst the corporates. A funding route that once was alien is now a preference. While large companies still leverage on multiple fund-raising options, including PE funds, the service based small and medium companies and entrepreneurs choose to approach PE firms instead of raising debt.
India leads the PE chart…
As per statistics, India has led the Asian PE investments charts in the first half of 2007, both in terms of number of deals as well as in terms of total value of the private funds raised. The credit to this goes to global private equity players who set up their shop here. The large PE firms that have billions of dollars in assets were the forerunners to set up their outfits here and the smaller ones soon followed the trail. The larger PE firms initially invested in large telecom and IT firms and tasted success. Smaller PE firms tested waters with investment size of $2 to $50 million. In the beginning, it was a tough iterative process between the PE firms and the corporates. Issues revolved around equity stake dilution, valuation numbers, due-diligence mechanism and transparency. This phase is getting over. Corporates seeking fund now understand the dynamics and motivations of PE funds far better.
After seeing the exuberance in the private fund market, few Indian banks and financial institutions were quick to pounce on this rally by setting up their venture funding arms. Here are a few points on what is driving the private fund market in India:
- Stability in the macroeconomic scenario – a consistent 8% plus GDP growth is a barometer of this growth
- India has clearly outperformed other Asian markets in terms of corporate growth
- A large service led market with many companies in the seed / incubation and growth stage having robust business and revenue models – financial services, IT, BPO, KPO, Telecom etc
- Banks have been hesitant in funding new service business like the BPO, KPO and other such niche areas. PE firms have a large risk appetite and have stepped in as angels
- A clearly defined value proposition and salience in the business and revenue models
- A strong entrepreneurial drive in the company management, growing transparency and professionalism
- BPO and KPO firms are willing to dilute equity stake
- There is a clear exuberance in the overall valuations
- The industry is clearly showing movement towards consolidation giving the PE firms an clear exit route
Figures suggest that PE firms have invested across almost all the sectors in India. However, financial services, business services (BPO, KPO) remain favorites. In 2003, about $100 million was invested in small to medium sized BPO / KPO. In H1 of 2007, this figure has jumped to $250 million. By the end of the year, this sector would have received 5 times the funding in a gap of just three years. This goes to show the infatuation that the PE firms have for the BPO & KPO sector.
