Private equity firms are deferring investment plans in India or bargaining for a bigger pie of the business citing global economic slowdown and growing uncertainty in domestic markets.
“A lot of investments which are at the term-sheet level have been deferred as investors are now reluctant to buy stake at such high valuations in this tough market,” said Bala Deshpande, senior managing director at US-based venture capital fund New Enterprise Associates (NEA).
PE deals fell to an eight-month low of $431 million in value terms in October, a 34% decline from $658 million in the previous month, according to data released by Ernst & Young.
Consulting firm Bain & Company says PE investors are sitting on $20 billion of dry, or un-invested, capital that can be deployed in India. But the escalating sovereign debt crisis in Europe and worsening US economy is depressing the investor sentiment, prompting them to revisit their investment plans.
A Delhi-based food company faced this situation in October when it was about to raise 70 crore from a Dubai-based investor. “The investor got back to us at the last minute demanding a bigger stake in the company for the same amount, saying the market has turned riskier,” the promoter of the company said.
Talks also fell through recently between US-based PE investor Warburg Pincus and India-MART.com for an 150-crore funding after differences emerged over the valuation, according to some reports. India-MART.com is the country’s largest online B2B marketplace for small and medium size businesses.
“In periods like this, there will certainly be disconnects between promoters and PE funds on valuations,” said Arpan Sheth, PE practice head in India of Bain & Company. “Promoters will most always have a more robust view of the growth prospects of their core businesses and can get frustrated that investors do not see the inherent growth engine in their business. So deals do get called off due to these issues.”
Small and medium companies which require private equity funding often do not have a defined competitive advantage in the sector they operate in, said Rahul Bhasin, managing partner at Baring Private Equity Partners.
“At the current situation when the economy is slowing down and inflation is high, there is definitely a margin pressure,” he said. “Risks in terms of liquidity, exit, governance and scaling in mid-sized companies are making investors adopt a wait-and-watch policy.”
This is particularly true for high growth sectors such as e-commerce, education and pharma where a correction is required. These sectors have less quality assets and significant investor interest.
“We don’t want to close any deal in a hurry,” managing director of a Delhi-based PE firm said.
Source: Economic Times