While the VC/PE business has matured a lot in recent years, it is still instructive to see the dramatic transformation which has occurred in terms of where investments are going. Completely different sectors are soaking in money in 2008, compared to even 2-3 years ago.
The industry started off in the late 90s, when the first foreign firms started looking at India. The new entrants focused at IT and internet, much in line with the craze in US at that time. Quite a few of the early deals didn’t work out.
The business really picked up only when investors broadened their horizons started looking at non-tech sectors like infrastructure, capital goods, financial services, retail, and so on.
In the last three months, for example, infrasructure and real estate accounted for 30% of PE investments. Energy, telecom, media/entertainment, financial services, and manufacturing followed. Between them, these six sectors mentioned here accounted for 90% of all PE investments over the last three months.
While this data may not be entirely accurate — some deals don't report amount invested — the point here is, traditional VC/PE sectors like technology, internet, healthcare have perhaps accounted for less than 10% of investments this year so far.
A clarification here: the distribution could look very different in the angel/VC space. PE deals tends to be large, and also focus on growth stage, rather than early stage. So the overall data here is perhaps coloured by trends in PE space.
The sectoral break-up in 2008 seems to be vastly different even from say 2006, when IT/ITeS accounted for about 20% of VC/PE money. Power/energy and real estate/infrastructure barely accounted for 10% put together. So what does this all mean? One inference: India is building up for the future.
In terms of capital allocation, it seems about right that basic areas like infrastructure, real estate, energy, telecom get the largest share of investments; following by second order needs like financial services, logistics and manufacturing. Media/entertainment, internet, retail/consumer are perhaps third order needs, in a country like India.
Some of the basic sectors seem set to pull in a lot more money going forward, if the announcements in April so far are anything to go by. About $ 5billion of new funds have been announced in April so far, around 70% this dedicated money for real estate/infrastructure. Some of the other money is sector agnostic, like Azim Premji's newly announced $1billion fund — some of that could also fund infrastructure and energy.
However, PE investors are supposedly represent smart money — so this sector allocation could change just as rapidly a few quarters into the future. For example, one sector which really hasn't attracted meaningful VC/PE investment is education.
A recent report by CLSA points out that private sector business in education is around $40 billion. If CLSA estimate is correct, this makes education bigger than the healthcare sector, and almost as big as IT/ITeS sector — the tradition favourites of VC/PE investors.
CLSA says, citing a household survey it seems to have commissioned, that education is the second largest item of middle-class household expenditure in India, after food. While a middle-class household spends around 25% of monthly budget on food, around 9% goes to education, compared to 3% on healthcare.
These ratios are very different from national averages, since CLSA's sample set is intentionally different. CLSA has claimed to find the demand patterns of India's consuming class.
Again, if this data is robust, it points to a great potential of education to throw up large businesses. One problem with education is that while private enterprises are there in basic schooling, and post secondary courses like engineering or management, most of these have been registered as trusts.
There are ways to work around these restrictions, for example, forming an operating company which the trust outsources or contracts out activities to.
Source: Economic Times