Private equity (PE) has emerged as a major investor class in India in over the last decade and investments under this category have grown significantly in the last few years. The year 2009 left bruises on many Indian deal makers and was nothing short of ?survival of the fittest??a term made famous by evolutionary biologist Charles Darwin. In contrast, 2010 was the period when deal makers started to come out of their closets, awaiting more positive times.

India has become popular as one of the three private equity destinations in emerging economies in 2010-11. The last five years saw private equity investments to the tune of $37 billion, which was more than one-third of total foreign direct investment. Private equity played a major part during this period, emerging as a bigger source for companies raising funds than the capital markets. In the last five years, more than 1,500 deals took place covering industries such as telecom, infrastructure, real estate, financial services, consumer products, healthcare, education, information technology and IT-enabled services. In terms of deal volume, technology attracted the highest number of PE deals in the current quarter (13) closely followed by infrastructure (11).

Last year showed that the mega deals and global industry consolidation are back but mainly led by cash rich corporates and not the highly leveraged deals which were prevalent in 2007. I have seen small deals really struggle for the past two years due to the lack of acquisition and leveraged finance from the banks. Indeed, I believe that this risk averse approach from banks will continue in 2011 and that mid market private equity firms will have to accept lower leverage and lower return projections to get deals done. This means of course that there will be greater pressure on management teams to perform, to make their businesses more efficient and that bolt-on acquisitions and buy and build strategies will be important to earning acceptable deal returns.

The coming months are expected to see a rising trend in PE deal activity, as global investors look for attractive investment opportunities in the emerging markets, especially India and China. Private equity buyers have long stressed the importance of recurring revenues, the defensibility of IPR and the importance of quality management teams. I think this will continue to be the case in 2011 and therefore project dependant systems integration and consulting firms are more likely to appeal to trade buyers than private equity.

VC players, as I see it, will be looking for value differentiation and will evaluate any investment on that basis. These players have shown interest in even early stage companies that are leveraging a technology shift to disrupt a big market. Innovation is the connecting thread and no matter what, it will still be one of the critical factors for decision-makers.

Publicly-traded technology companies with a market capitalisation between $1 billion and $5 billion which are relatively mature and cash flow-positive are attractive to mid-sized and big private equity firms. The mobile, social, cloud computing, storage, security, and analytics segments drove much of that activity, as did healthcare and clean energy. Twenty-six technology M&A deals have topped the $1 billion mark in recent times. Among the biggest ones were Intel?s $7.29 billion deal for McAfee (security), SAP?s $5.65 acquisition of Sybase (analytics, mobile integration), NTT?s $3.23 billion acquisition of Dimension Data (IT infrastructure services), EMC?s $2.25 billion acquisition of Isilon Systems (storage), Attachmate?s $2.14 billion deal for Novell (infrastructure software), and Hewlett-Packard?s $2.07 billion acquisition of 3Par (storage).

PE firms and venture capitalists are considering young turks/entrpreneurs whose start-up firms promise to grow 10-20 times in a short span of 2-3 years. Most of these firms are from information technology-enabled services space and set up by graduates from leading B-schools and technical institutions. The funds look for entrepreneurs with a strong passion for the business and a desire to make a difference. It is the growth potential in these start-up firms that primarily attracts fund managers.

The VC funds evaluate the technology and services that the new companies provide, the business opportunity potential, the team and management strengths. Most of them generally look at firms that can grow 10-20 times in 2-3 years as also the exit options. They evaluate a project based on its potential to be acquired by a larger firm or its potential to raise money from the market through an IPO. They are also influenced by the educational background of the entrepreneurs and those who are focused on delivering quality and have robust processes for running a successful business. Highly qualified individuals are also able to attract high-calibre people to their ventures, improving the chances of their ventures outperforming competition.

Strong management teams that have a combination of domain expertise and some experience of scaling companies is of great value. PE firms also look to invest in companies that are participating in large and growing but open/deregulated markets. Backing a new venture is inherently risky and there is no assurance of return and so, often, their topmost criterion (for funding) is the team?s ability to understand the markets and execute the plan.

A trend of investments in clean technology is also emerging due to global climatic changes and the finite nature of natural resources. India?s requirement of importing such technology to avert its increasing woes of pollution and shortage of clean water has made it one of the prime destinations for investors with regards to clean technology as well.

Thin client structures have been around for a long time but the latest evolution of these to hosting ?in the cloud? and offered on software-as-a-service basis is finally beginning to achieve traction. Corporates have been investing vast sums in server farms for several years making solutions offered in the public cloud increasingly attractive, certainly to the B2C market. For the B2B sector, where virtualisation is a virtue but security is a necessity, outsourced cloud and SaaS solutions are now beginning to gain traction. From an M&A perspective, service companies which can implement cloud solutions will be attractive. As there is currently a shortage of data centre resources, deals in this infrastructure area are likely to command significant scarcity premia.

The writer is chairman, CA Technologies (India)