Short term losses, long term gains: VCs

Priya Srinivasan in Mumbai

Leading private equity and venture capital players in the country are unanimous in their view that while the short-term effects of the terrorist attacks in Manhattan is likely to be a dramatic slowdown in deal closure and a further dip in valuations, the long term scenario seems to indicate that India will be positioned very well in terms of private equity inflows.

“Over the next quarter I expect the number of deals closing to be lower by about 60 to 70 per cent,” said Mr Raj Dugar, co-founder, Westbridge Capital Partners. “Over the last week, its only the deals in the pipeline, which have been completed, the view of the US investors broadly at this point is that the US is at war and so the notion of looking at investment opportunities has turned completely negative,” he added.

“This week is definitely going to be spent in the wait-and-watch mode, once the dust settles in the next few weeks, private equity investors will begin to look at opportunities yet again, but I suspect valuations will fall even further,” said Mr Pradip Shah, CEO, IndAsia Fund Advisors.

Mr Shah added that while news of action against terrorists could provide some relief to the markets in the coming weeks, private equity investments are likely to exhibit signs of the crisis over a longer period of time. “Investors are likely to drive down valuations across sectors given the overall downturn in the economy,” he added.

As far as funds who are currently raising more money from investors go, there will be a slowdwon in that effort too. “Undoubtedly fund raising will slow down even further now,” said Mr Pravin Gandhi of Infinity, which is currently raising its latest VC fund. He added, however, that since Infinity had been in negotiations with funds in Europe, the Middle and Far East, he did not expect a major setback to the fund raising process of the company.

All said however, there is broad consensus in the private equity investment community that India is positioned very well as an investment destination in the long run.

Said Mr Mahesh Murthy who runs the angel fund, PassionFund, “The US is no longer the gold standard, its just another country from now on in the eyes of the investors and more and more people who allot portfolios are likely to look at countries like India and Israel more seriously, India definitely has better chances now.”

Mr Dugar points to another key reason why Indian companies will make good investment proposals down the line. “Indian companies typically address much larger markets than US companies, which tend to be more inward focussed. Indian companies are therefore hedged better against risks and that is a positive,” he added.

VCs also feel that the inherent cost advantages of Indian companies will prove to be a major lever. Given that overall technology spending by corporates is likely to be down, its in these difficult times that cost advantages are highlighted and once again, VCs feel Indian companies stand to gain.

The consensus seems to be that India will be in a strong position to attract large private equity inflows in the next four to five quarters, but in the meantime the sector is gearing up for a phase of slowdown in deal closures and fund raising.