Deal size surges as risk appetite is back

The average deal size has gone up from $7 million in 2009 to $12 million this year.

With the economy reviving, the average size of a private equity (PE) deal has almost doubled over the past year.

“The average deal size has gone up from $7 million in 2009 to $12 million this year. Risk appetite of LPs (limited partners) has improved over the past year,” said Arun Natarajan, MD & CEO, Venture Intelligence.

“The deal size has gone up in the past few months. Capital requirement for infrastructure — roads, ports and power — is so huge that if PEs want to invest in these sectors, the ticket size has to go up,” said Rajeev Gupta, managing director, Carlyle.

LPs, who were facing shortage of capital last year, are now more comfortable in investing large amounts.

Experts attribute this to the return of LPs’ risk appetite. Last year, LPs were sitting tight on cash. Fund-raising was difficult for both new and established funds.

Against a total investment of $840 million in January-April 2009, PEs have invested $3 billion so far in 2010. The number of deals was73 in the first four months of last year; it was 91 in the same period this year. In 2009, PEs invested $4 billion.

“Now, PEs are willing to put in $30-50 million in one deal. Earlier, when liquidity was scarce, we saw more co-investors for large deals,” said Ritesh Chandra, executive director, Avendus.

Also, PE players were uncertain about fund-raising in 2009. This year, when around 45 funds are raising money, a few have already announced closure. Multiples Alternate Asset Management, headed by Renuka Ramnath, has raised $250 million (Rs 1,250 crore). Aditya Birla Private Equity, which announced its second closure, has raised Rs 880 crore this financial year.

Last year, LPs were negotiating hard with PE players. They were scrutinising every deal and looking at more rights. The fees paid by them were also said to have come under pressure.

“Of late, LPs are more comfortable in putting in a big sum in a particular company. PEs’ attitude towards investee companies is also changing. It makes sense for PEs to invest in two-three midsize deals and manage the investment properly than to invest in five-six companies and lose track of the performance. They are now spending more time with their companies,” said a private equity investor.