PE firms have invested $5.9 billion across 204 deals between January and June this year compared with $3.8 billion invested across 219 deals in the same period last year, according to advisory firm Grant Thorntons Dealtracker report a 55% year-on-year increase. Most of this funding has gone into sectors like information technology and related services, real estate and manufacturing.
The size of the deals has also gone up in the first half of 2013, which is evident from the rise in number of deals above $200 million. Six deals over $200 million were closed during the period versus just one deal above that range in the first half of the previous year. Experts believe that large deals will be the norm this year.
In the past, buyouts were very difficult and most investors shied away from it. PE players had a minority role in a company for a long time. But they soon realised that there are more challenges in exits with less rights and new players are now open to do controlled transactions. This interests the promoters as well as buyout offers them a good value, said Siddharth Shah, partner at legal advisory firm Khaitan & Co. Also, since the IT-BPO sector is seeing consolidation, buyouts will be higher in the sector. IT and ITes attracted 10% of the total PE investment by value in the first half of this year.
The faster deployment of capital is partly due to dipping valuations as promoters become more realistic about their ability to raise funds in an environment where the secondary markets are sluggish and the cost of debt is high. Few factors have helped faster deployment of capital like the valuations having come down to a more reasonable level. Until last year, valuation expectation continued to remain high in the hope of capital market revival for an IPO but the promoters soon found PE investment a viable option, said a fund manager of a large PE firm who did not wish to be identified.
At the same time, previous investors are keen to show returns through exits. Many PE funds had raised capital in 2003-04 and by 2013 their fund life neared an end, hence the rush of secondary deals coming through. The funds that are being wound up are giving way to new funds for investment. Also, promoters today are willing to sell their stake as they are focusing on encashing the companys value, Shah of Khaitan & Co said. It is the liquidation period now for many funds that were raised in 2003 to 2004 or and 2005.
Despite a near-term negative view, PE firms are optimistic of the long-term attractiveness of the Indian market and thats another reason that deals are being struck at a time when valuations are turning reasonable. PE investors have taken long-term view of growth prospects of the Indian economy. People have not written off India. I think medium- to long-term prospects are pretty attractive. We could have seen a much larger surge in deals had it not been for the issues around the currency and other factors, said Jayanta Banerjee, managing partner at ASK Pravi Capital Advisors. His firm recently invested Rs 60 crore in Hyderabad-based OMNI Hospitals.
Not all PE fund managers are that optimistic and feel that the spike in deal volume in the first of this year has been driven by a handful of large transactions along with secondary market deals.
"Generally, the confidence that business leaders have in the economy today is low and they will not invest large amounts of capital. The only reason why investment can be of the same level as last year is because of rising secondary deals. PE funds are coming to end of their fund period and hence ready to show exits. Overall, I do not see a significant rise in the level of PE investments in India this year compared to the last year, said JM Trivedi, partner and head, Actis South Asia.