With $1.48-billion PE investment in the first quarter of the year in India, big and small ticket deals in private equity are back, and with a bang. What?s more, it?s not just that the traditional favourites are finding takers?from education to logistics, PE funds are exploring newer avenues like never before, including targeting sector-specific funds. Also joining the PE brigade are cash-rich PSUs such as BSNL, which is looking at creating a PE fund to invest in start-ups with its Rs 35,000-crore cash reserves.

The lull of 2009 seems to be the past for PEs. Vikram Utamsingh, head, private equity advisory services, KPMG, reasons, ?There is a backlog of companies looking to launch IPOs and the IPO market is sucked up by the PSUs that the government is selling. As a result, several private businesses are looking to raise funds from PEs against the IPO market.? He adds that PE firms are keen to invest, as many PE firms have ?dry powder? and several global funds have entered the Indian market in 2009. These include KKR, Advent, Apollo and TA Associates among others.

Sectoral churn

A recent survey conducted by Venture Intelligence reveals that infrastructure services tops the list of sectors most favoured by PE firms, followed by education, financial services (especially microfinance), healthcare, agri-business, alternative energies?in that order. ?There is a marked sectoral churn,? says Arun Natarajan, managing director and CEO, Venture Intelligence.

CG Srividya, partner, Grant Thornton, explains that in terms of value and volume of deals, a significant proportion of PE investments are still going to sectors such as telecom, real estate and infrastructure, IT & ITES. Nonetheless, there is an increased level of interest in niche sectors such as education, agri products and logistics. ?In 2009, there were seven PE deals valued at close to $100 million in the education sector, seven in agri products valued at about $75 million and 11 in logistics valued at $215 million. PE players had moved beyond the core sectors a few years back. However, now they are looking at newer sector opportunities on a constant basis.?

Aditya Birla Capital Advisors, the PE arm of the Aditya Birla Financial Services Group, which closed its first fund this March, has reportedly identified investment avenues in medical diagnostic companies ?with innovative ideas?a kind of shop-in-shop, where labs are being set up in hospital chains under a contract agreement?. Kuldeep Tikkha, partner, Transactions Advisory Services, Ernst & Young, confirms how consumption-driven sectors have witnessed a marked increase. ?New entrants in the space are education, financial services that include NBFCs and financial intermediaries, retail, FMCG, health (including hospitals), diagnostic centres and medical equipment, which are grabbing considerable attention,? he says.

The biggest deal of the season remains Asian Genco for $425 million, where a clique of investors, led by Morgan Stanley Infrastructure Partners, bought 44% stake in the power generation and engineering services firm. Meanwhile, the education sector grabbed the third spot among the top five sectors in February as per Grant Thornton. Figures speak for themselves: in January, India Equity Partners invested $36.6 million in IL&FS Education and Technology Services, which offers courses in IT and spoken English. In February, the Nadathur Group invested $10 million in Career Point Infosystems, which provides coaching for entrance examinations for engineering institutions and medical colleges. This was followed by the $42.55 million investment in Manipal Universal Learning by PremjiInvest, a fund promoted by Wipro Group chairman Azim Premji.

Shweta Jalan, director, Advent India PE Advisors Private Ltd, says, ?Education is as important as coal today.? This sentiment is also echoed by Rohit Madan, research director, VCCEdge. ?Education is one of the hottest sectors in India and commands very high valuations. It is recession-proof, non-cyclical and ranks among the top consumer spends. It also has relatively stable cash flows and a high return on capital, which makes it very attractive,? he says.

Agrees Jacob Kurian, partner, New Silk Route Partners, which has recently picked up over 30% stake in Nectar Lifesciences, a Chandigarh-based pharma company, ?Education is a core part of the future of the country and given the huge demand, there is a lot of investor interest in the sector. However, given the current regulatory environment with an overt ?not-for-profit? orientation, the number of deals directly into education has been limited to companies that are providing services to the sector.?

?The Indian market is at an interesting inflection point,? says Vishal Tulsyan, CEO, Motilal Oswal Private Equity Advisors Private Limited (MOPEAPL), which has invested in Pune-based dairy firm Parag Milk Foods, reverse logistics firm RT Outsourcing and Rajasthan-based NBFC AU Financiers. ?We are very excited about the potential of the non-core sectors. Education has immense scope and we are seriously looking at it, but it has regulatory hurdles,? he says.

MOPEAPL has invested in financial services and is looking at a second round of funding there. ?We are especially looking at opportunities in tier-II and III cities that have enormous growth potential and the government is also focusing there,? Tulsyan says. He adds, ?Ours is a sector-agnostic fund, but we are making investments in prospects linked to the domestic market, which have a direct link with the consumers. We are going where the Indian consumer story is going.?

Such has been the level of enthusiasm in the consumer segment that even corporate gift companies are struggling for PE space, with eYantra Industries Ltd, a Hyderabad-based corporate gifts and brand merchandising company, raising $7.8 million in its second round of PE funding led by Argonaut Private Equity. Textiles maker S Kumars is also reportedly talking to PE firms to spin off its brand Belmonte, in the next three-four months and is considering interests from five overseas players.

Finding focus

In the present market matrix, also gaining momentum is a trend of PEs having a sector-specific focus. Experts opine that clean technology will be a sector to closely watch out for in this space. With YES Bank?s recent announcement to raise $80 million in the first round of fund-raising for its private equity fund focused on clean technology, the sector certainly looks hot. The bank is reportedly partnering with PE firm Global Environment Fund, which invests in clean technology and energy-efficiency segments in emerging markets for its clean tech fund. Also joining the clean tech wagon is BTS Investment Advisors, which is launching a $150-million green fund, and IndiaCo Ventures, which is launching a $250-million international private equity fund primarily focusing on clean energy, indicating a clear shift in PE companies targeting sector-specific funds.

On a sector-specific route, Rabo Equity?s Indian Agri Business Fund has raised $120 million and is now looking to invest an additional $40 million in 2010, apart from the $10 million it put into Avantha Group?s agri firm Global Green. The fund has also invested in Delhi-based LT Foods, which owns Daawat brand basmati rice and also picked up 26% stake in Geepee Agri. Utamsingh affirms, ?Being sector-specific makes sense in certain sectors. With over 200 active funds in India, PE funds need to differentiate themselves in competitive deals to have a chance for winning the deal. Here, they need to show industry expertise that will be recognised by the companies they invest in. One way to do this is to be sector-specific and have sector experts on the team who will be able to add value to the businesses they invest in.?

Sector-specific funds allow the fund manager to ?specialise? in a particular industry, help in developing vast industry relationships and understanding the intricacies of the sector, explains Madan. ?Fund managers are more equipped to add value to portfolio companies and forecast industry changes. Such funds satisfy a specific need for limited partners (LPs), who might hold a greater interest in a particular sector and also help investors in constructing a well-diversified portfolio,? he says. However, he cautions that on the flip side, a dramatic drop in the target sector will affect the fund much more than a diversified fund.

In the same vein, Sanjeev Bhalla, head, equities and alternative investments, Bank of Bahrain & Kuwait, warns that the Indian market is not ready for sector-specific funds. ?Most PE funds in India are anyway focused on a handful of sectors that are in vogue. There will always remain some sector-focused funds for specific set for investors. The Indian PE market is still not mature enough for these funds. Even investors into PE funds look for diversified exposure to deals across sectors.?

Given the dynamics of Indian market, Kurian sums up, ?We don?t believe that any industry sector, other than infra, has the depth for investible companies to justify a sector-specific fund. It makes for a great fund-raising story, but unless the fund can bring some true differentiator, other than capital, which all other funds also have, I am unsure if these funds will do well.? How the matrix unfolds for the PE market remains to be seen.

Exit route

Just as economic conditions are showing signs of stability and the primary market is coming good, the exit scene in the PE/VC space is interestingly poised. VCCEdge, estimates that the year so far has already seen $800 million worth of exits compared to $2,200 million in 2009 and $930 million in 2008.

Cashing out their investments, Trinity from IL&FS Transportation; Cliffrose Investment from DB Corp; Monet from Hathway Cable & Datacom; Siva Ventures from Aamby Valley; Nalanda Capital from Sun TV Network; Kleiner Perkins and Sherpalo from Info Edge; Lehman Brothers and Merrill Lynch from Cox and Kings (India) have taken either the IPO route or sold their equity holdings.

?We will see more exits through an IPO and also see PE deals changing hands with other PE firms (PE selling to PE), as many deals have been held for three to four years and these firms need to exit their investments. Larger PE funds would be willing to pick them up, provided the underlying portfolio companies are attractive,? says KPMG?s Vikram Utamsingh.

A sentiment also echoed by VCCEdge?s Rohit Madan, ?General partner (GPs) need to prove they can make returns before they set out to raise new funds. Funds are utilising every opportunity to exit as long as they make a profit. The bounce in the public markets has resulted in a slew of open market exits. If the primary market remains strong, we will see more IPO exits as well.?

Experts opine PE funds have learnt the discipline of exit the hard way during the financial crisis, when valuations dropped from an all-time high to very low levels. Sanjeev Bhalla, head, equities and alternative investments, Bank of Bahrain & Kuwait, explains that this is still a learning stage in PE investments. ?Some big corporates make investments in small competing or complementary businesses, which helps them to grow their core business. If successful, small businesses are acquired by big corporates or ultimately closed down if unsuccessful. This trend will continue to grow and most businesses will start following this method to stay ahead in a competitive market place,?he opines.

Given that exits are important for all mature investments, Jacob Kurian, partner, NSR Partners, feels, ?Deciding when and how to exit is a very key strategic issue for a PE. If a company is growing very strongly, then the PE has to decide whether to stay invested or to use the buoyancy to find and exit.? As Avinash Gupta, financial advisory leader, Deloitte, rounds up, ?Good valuations don?t last all the time.?