Cash flows where

The Financial Express
Posted: 2008-05-09 22:11:27+05:30 IST
Updated: May 09, 2008 at 2211 hrs IST

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India, as the private equity universe sees it, is an energy story. This is quite surprising as conventional corporate wisdom has ascribed that role to the information technology sector. But PE firms are convinced. The number of PE deals is still the largest in the IT sector at more than one-fourth of the total, but the largest sum has flown into the energy sector, around $700 million. This is surprising in another sense: the capital intensive energy sector is not normally expected to attract PE funding, because of longer timeframes and consequent risks. Yet obviously the ongoing Nelp VII and exploration in coal bed methane fields are proving to be a big draw. Just compare the figure for the first few months of 2008 with PE investment in energy in the whole of 2007: $700 million to $1.1 billion, two-thirds already.

Indeed, PE investment as a whole rose sharply in the first quarter of this year, a jump of 22%, totaling $3.28 billion. Telecom, with $624 million in PE investment, follows energy as a fund attractor. This is interesting for a little noted reason: telecom and energy have very few players and most of these are listed. So, the space for PE investment should have been limited. A possible explanation could be the formation of special purpose vehicles to finance acquisitions and expansions. The two conventional wisdom favourites of the PE universe, IT and pharma, are losing out somewhat. In the IT sector, the US slowdown and rupee gyrations are probably making PE investors less optimistic that new entrepreneurs will hit pay dirt. The pharma sector may be less favoured because by PE investor reckoning, costs may be a little too high. This year, so far, the sector has got 11 deals and about $335 million worth of funding. Last year, there were 29 deals, and $478 million was invested. The other big loser, so far, is the real estate sector. No PE deal deal has materialised in this sector. But it received $2.6 billion from 32 deals last year. It is obvious that real estate has been hit by the monetary instrument hammer used by the central bank over the past year or so. And PE’s lack of interest in it is further proof of how interest rates can dramatically change the business environment for the worse. This is very sad from the perspective of all those who had big plans here.