China VCs? most-favoured, India in 2nd spot

Even as recent industrial output numbers signal that the Indian economy is gradually heading towards the recovery path, it is China that catches the fancy of venture capitalists (VCs).

?Apparently, among venture capitalists, there?s China and there?s everyone else,? says a recent global survey by Deloitte Touche Tohmatsu (Deloitte) on VC sentiment in the times of recession.

The survey reveals that 50% of global and non-India based Asian investors who plan to increase their investments over the next three years look at China as the favourite location. India follows its neighbour to get the second spot with 43% of VCs expressing interests to invest in the country this year. This is up from 29% in 2007. In the US, 42% VCs ranked China as the best location for investments followed by 24% favours the US, while 12% of US VCs surveyed ranked India as the best location. Indian VCs expressed maximum optimism about their home country, with 75% ranking India as the top destination for VC funding over the next three years. Globally, India ranked second after China and was followed by the US. ?This is expected as India and China have had growth rates of over 7% and the US is the biggest VC market and has a reputation of being the hot bed of innovation,? said Kalpana Jain, senior director (financial advisory), Deloitte.

While the survey found that China was the top location, clean technologies (cleantech) stood out as the hottest emerging sector where maximum VCs would increase their investments over the next three years. Globally, 63% of the respondents said they would increase investments in this sector. In India, 76% of the investors said they would increase investment in cleantech companies, while 55% of US VCs, 66% of the Americas? (excluding US), 50% in UK and 71% in Europe (excluding UK) shared the same view. Cleantech sector includes solar, wind and solid waste management companies. Jain added, ?Interest in this sector was generated as a result of volatile crude oil prices. When the crude prices rose, investment in cleantech increased significantly. Even when the prices fell, companies continued to invest to provide energy options that would reduce the high dependence on hydrocarbons. In India, huge potential in alternate energy has lead the ministry of new and renewable energy to set up an incentive structure for companies in states such as Gujarat, Tamil Nadu and West Bengal. While there are already a few players in wind energy in India, solar seems to be gathering steam.?

Moreover, life sciences sector, including medical device and equipment and bio-pharmaceutical companies are attracting significant VC investment with 40% VCs in the Asia-Pacific expressing interests to increase investments. Consistent response was noted to telecommunication sector, with 56% of global VCs said they would maintain the level of investment they have been making in telecom companies, 44% said the same of their investments in semiconductor and high electronics.

In India, 55% of respondents said they would increase their investment in telecom and other related mobile and value-added services.

Interestingly, in India requests from the government differed from global respondents. While globally 59% asked for favourable tax policies for venture development and 17% asked for improved quality of local infrastructure such as airports, roads, electricity, broadband etc, in India 64% VCs sought improved quality of local infrastructure and 39% wanted favourable tax policies.

Recession notwithstanding, VCs expressed interest in investment continuity and even increasing their fund sizes. In India, the increase is expected to be the most with 64% of respondents said they would increase fund size in India, followed by Europe where they said they would increase by 54%. Globally, 45% of respondents said they would increase fund size, 37% said they would maintain it as is and 18% said they would decrease fund sizes.

An outcome of the global banking crisis was also a shift in suppliers of capital who traditionally have been commercial and investment banks and corporate operating funds, while this survey showed that over the next three years government and family businesses would be critical suppliers of capital. (see chart) Deloitte in its 5 th ?Global trends in venture capital: 2009 global report? surveyed 725 venture capitalists with $50 million to $1 billion in assets under management. Jain added, ?Venture capital is a very global industry with more than 52% of VCs investing outside country of origin. However, we found the response to the recession was different for bigger VCs with more than $500 million in asset fund who said they are not planning to increase their asset fund, whereas smaller VCs with up to $500 million in investments said they wanted to increase assets under investment.