PE, VC investments to regain 2007 peak this year: Study

Private equity (PE) and venture capital (VC) investment are projected to reach $17 billion (Rs 80,000 crore) in India this year, the same as the previous peak year of 2007, according to a study by Bain & Company.

Their India Private Equity Report 2011, issued in partnership with the Indian Venture Capital and Private Equity Association (IVCA), said there was renewed confidence in the Indian PE market.

When the survey asked respondents how much their firm had targeted to invest annually in India over the next six to 12 months, only about seven per cent foresaw investing between $200 million and $500 million. Looking out beyond next year, however, the proportion of respondents anticipating making annual investments of $200 million to $500 million increased nearly fourfold, to 27 per cent.

Nearly two-thirds of respondents surveyed said they expected the industry to grow between 10 per cent and 25 per cent into early 2011. For 2012, the prospects are even brighter: the report finds 60 per cent of respondents see the sector growing by 25-50 per cent.

“The number of PE firms — both foreign and domestic — continues to grow. This increasing population of hungry deal makers is wielding a lot of dry powder and they’re eager to put it to work. Our estimate is that current investment reserves are deep enough to finance between two and four years of PE deal making,” said Sri Rajan, head of the PE practice for Bain in India and lead author for the report.

In the aftermath of India’s brief six-month economic slowdown, the study results show foreign venture capital investments (FVCI) are expected to rise by 30 per cent over the coming two years. Factors cited include the renewed strength of India’s economy and the government’s intention to use these funds to spur innovation.

The study also identifies areas of caution in the coming PE market. Though the macro-economic picture is far better today than two years earlier, and the outlook among respondents decidedly optimistic for the PE industry in India, fund managers face rising acquisition costs and intense competition to land the best deals. These factors are increasing the pressure on them to become more directly involved in adding value to their portfolio companies over the typical three- to five-year ownership period.

“To succeed, it is not enough for PE investors to just be a source of funds. They must be able to position themselves as providers of expertise, in addition to funding,” said Rajan.