Total investments announced by PE funds have fallen a massive 82% from Rs 8,200 crore in January ’08 to a mere Rs 1,480 crore in October ’08. This clearly shows that PE deals are on a downward trajectory.
CHANGING TREND
ETIG analysed PE data released by advisory firm Grant Thornton for the first 10 months of ’08. The data reveals that real estate and infrastructure sectors have been the outperformers for the year so far, attracting 33% of the total Rs 43,515 crore worth of investments committed by PE players in the first 10 months of ’08. But given the changing dynamics of the Indian and global economies, consumer-oriented sectors have now replaced capital-intensive sectors like real estate.
This does not mean that PE funds will not continue to invest in infrastructure or ports and logistics, but the focus has shifted to sectors driven by consumers’ wallet. In fact, even in the international PE space, the focus is more on retailoriented growth sectors like transport, healthcare, retail, logistics and financial services. Investment wizard Mark Mobius is also investing in consumeroriented sectors in India and China.
Information technology & IT-enabled services (ITeS), media, entertainment & publishing, pharma, healthcare, biotech and telecom sectors are seeing a consistent increase in PE investments. All these sectors are driven by end user demand.
PHARMA
Currently, only 10% of the Indian population has health insurance. With a growth rate of 50% per annum, the health insurance business in India is expected to reach Rs 23,000 crore by ’10.
This presents a huge growth opportunity for PE players. Since PE funds typically invest for higher returns, investing in the early stages of growth provides higher gains. These can be in the form of capital gains, arising on account of increase in valuations of the investee company over the investment period.
These players then sell their stakes at significant premiums, either to another investor, or in the capital market through an initial public offer. On the other hand, the investee company makes use of the expert advice offered by the PE players, which can be in the form of a new product launch or assistance in merger and acquisition activity.
Some PE players like ICICI Ventures, Carlyle, Blackstone and ChrysCapital have evinced interest inthe healthcare sector. Not surprisingly, health and wellness centres, spas, ayurvedic, herbal skin, slimming and beauty centres are finding favour with PE players. Investments in this sector have increased from Rs 513 crore in January ’08 to Rs 1,597 crore in October ’08.
TELECOM
This is another sector that has witnessed increased interest from the big daddies of the financing world. A 42% increase in funds committed in the past 10 months highlights the huge growth potential in this sector. Providence Equity Partners’ equity purchase worth Rs 2,688 crore in Aditya Birla Telecom was one of the year’s biggest deals in the telecom sector.
Kohlberg Kravis Roberts’ (KKR) investment of Rs 1,000 crore in Bharti Infratel was another major deal in the telecom industry. This shows that investments are taking place in more established business models because these have profitable cash flows.
MEDIA
Media, entertainment and publishing is another sector that been slowly gaining momentum. Though there has not been any multi-million-dollar deal in this space, many smaller transactions are taking place in the sector. PVR Pictures, Laqshya Media, Percept and Real Image Media Tech are some of the companies that have received foreign funding.
THE LAGGARDS
An important point to note here is that this incremental investment is coming at the cost of investment in sectors like real estate and auto. Backed by large landbanks, the real estate sector was commanding very high valuations till some time ago. However , following the crash in the stock market, the valuations of listed players have fallen drastically. This has made PE players more cautious of their future investments in the realty sector.
THE END’S STILL FAR :
However, it is not only the real estate and auto sectors that are witnessing a slowdown; the entire industry is facing a liquidity crisis. In ’08, PE deals slowed down for the first time in July in terms of numbers as well as value.
The total number of deals in the first seven months of ’08 stood at 215, against 224 in the first seven months of ’07. Though PE deals have slowed down, certain PE funds still feel there is value in several companies.
The recent Rs 12,960-crore PE stake sale in Tata Teleservices to Japanese firm NTT DoCoMo proves that certain promising business models still exist even today and one can make the best of it.
Source: Economic Times