The good news, going by Bain & Company?s Indian Private Equity Report 2011 is that, with the economy back on a growth path, private equity and venture capital is also back and will grow at a scorching pace. With $9.5 billion put in 380 deals in 2010, this is more than double that invested by PE/VC investors in Indian companies in 2009?it is, though, smaller than the $17 billion put in the peak year of 2007. In a short span of under a decade, PE/VC firms can be proud of the fact that a third of the top 500 companies in India were backed and/or discovered by them?given that small firms and start-ups find it difficult to tap traditional sources of capital, that?s an impressive track record to have. Since PE/VC firms were able to get around $5.3 billion from getting out of some investments, in 2010, the investments are pretty lucrative and are a good signal for future PE/VC investors. A marquee and highly profitable exit was that of Actis and Sequoia Capital from Paras Pharma which was sold to Reckitt Benckiser, netting these PE biggies over 450% return in just under four years!
There are some worrying signs though. The report says that the bulk of new capital that PE/VC players will raise, around 80%, will continue to come from offshore funds, highlighting the relative absence of local money here. Even though a growing number of domestic investors have started funding PE/VC corpus, unequal, ambiguous and often complex tax and legal burdens prevent them from participating to their capacity in this growing asset class. Another reason for low share of domestic investors in PE/VC funds is the conservative nature of domestic institutional investors, who tend to either shy away completely from any form of ?risk investing?, or tend to put all their investment eggs into PE/VC funds run by quasi-government players, thus leaving privately-run PE/VC funds little choice but to raise money from foreign investors. A growing, and alarming, trend in domestic fund raising is soliciting of high net worth individuals in this relatively illiquid asset class because of a longer lock-in period which is suited best for institutional investors like pension funds, endowments, insurance companies, and individuals only if they happen to be dollar multi-millionaires who can afford to invest their money for over a decade or so. Domestic regulation needs to clear the air on PE/VC asset class to address both institutional investor unwillingness and protecting retail investors? overzealousness in investing in what has come to symbolise as ?patient capital?.
