The economic slump may have slowed down the overall private equity investments scenario, but relatively more PE deals are being struck in the emerging businesses space. In the third quarter, including mergers & acquisitions, private equity and venture capital deals were on a decline.
However, over 40% of the total deals happened in the emerging companies (SMEs and midcaps). The percentage of the same was only 25% in the last quarter. Interestingly, of the total 12 PE deals in October, six (50%) can be categorised as emerging companies. According to figures obtained from Grant Thornton, the announced value of all the 12 deals stood at $372 million.
Says Arun Natrajan, CEO, Venture Intelligence, a firm tracking deals in India, “In the third quarter, the companies which were started in past ten years have become an attractive bet. Around 50 deals were seen in emerging markets, and the number may increase in the next quarter.” It is observed that most of the deals in the emerging companies were VC deals.
The increase in the number of VC deals is attributed to the funds available with the VCs. While the PEs are going slow on the deals, the VC funds are investing the funds they had already raised earlier. “While Late Stage investments accounted for a third of the deals during third quarter 2008, the share of venture capital investments rose to 40% in volume terms,” adds Mr Natrajan.
“Yes, the valuations are attractive but we are still cautious about the deals. Moreover many entrepreneurs are not willing to divest in this situation as that would not fetch attractive returns, only those who are in need are going ahead,” says Sabina Bhavnani, assistant vice-president, M&A at IL&FS.
Analysts say that pre-IPO placements and buyouts completely dried up during the third quarter. The July-September quarter saw almost $1.8 billion being raised by India-dedicated private equity funds. Of this, Sequoia Capital successfully raised a $750-million second growth capital fund. Other firms that closed new funds during the period included Franklin Templeton, Nexus India Capital and Gaja Capital.
“Earlier, funds which came to India used to invest in a company and made money by offloading the stake when the investee company went public. They could sustain well to start with because of the prevalent market conditions, but the downturn in markets has left many such funds bleeding, forcing them to distribute whatever amounts they are left with by investing in emerging companies,” says Mahesh Murthy, managing partner of Seedfund. Experts say that in the current market conditions, it is recommendable for a fund for distributing $50 million amongst 10 companies than investing the amount in single company.
“A number of funds are adopting the traditional VC way of investing, that is investing in a company and working in close tandem with the company for making it grow and creating value so that good returns accrue during the exit. Now, they (funds) are putting less money and getting a better position, while earlier they were putting more money and getting lesser position,” adds Mr Murthy.
“In the present situation, many PE firms are likely to be ve ry bullish on emerging companies. Many emerging Indian companies have a great potential and global ambitions mid-to long-run which makes them an attractive bet for a PE fund,” says Prafull Jain, executive director, KPMG.
“Over the last five years, many mid-sized owner managed businesses have become increasingly ambitious to have global footprint and presently, the valuations are very attractive. But given the credit crunch, such companies would need very innovative structuring solutions to fructify the acquisitions,” added Mr Jain.
Source: Economic Times