PE flows to small and medium units fall 3%

The information technology and IT/ITeS sector continued to attract investors, and industry experts attribute this to the IT/ITeS sector's ability to innovate, which other sectors lack

Private equity (PE) investors' interest in the country's micro, small and medium enterprises (MSME) sector gained momentum in 2013 in terms of the number of deals reported, which increased by 26 per cent. However, the total value of deals (in terms of size) dropped by around three per cent.

The information technology and IT and IT enabled Services (IT/ITeS) sector continued to attract investors, and industry experts attribute this to the IT/ITeS sector's ability to innovate, which other sectors lack.

According to data compiled by Venture Intelligence, an organisation that tracks PE and venture capital activity, in 2013 (January-December), the number of deals was 222, valued at $1,254 million, compared to 176 deals in 2012, valued at $1,296 million. In the last five years, 2013 reported the highest number of deals. The data is for companies with annual revenues of up to Rs 100 crore. (FUNDING SHORTFALL)

Avinash Gupta, senior director and leader, financial advisory, Deloitte in India, attributed the drop in total deal value to the slowdown in capital deployment by companies: "Lots of Indian PEs provide funds for growth capital. Last year, since the economy did not grow, capital deployment by companies was less. Besides, average deal size was also less."

He said the same trend would continue in 2014, again reflecting overall economic growth. Since the IT/ITeS sector is global in nature and not impacted by the domestic economy, it continues to attract a large chunk of investments, he said.

Creador Advisors India Private Limited Senior Managing Director Anand Narayan noted that early-stage funding in the SME space is gaining momentum, and in the last two years the number of start-ups that have been funded has also increased.

He added, "Many funds are forced to look at smaller investments because the infrastructure space, including power, ports, telecom and others, have slowed down and pulled down the average deal size."

Creador, a PE fund set up by former ChrysCapital General Partner and Managing Director Brahmal Vasudevan, is in the process of raising $250 million from investors to close its Fund II after raising $130 million for its debut fund in 2012. The firm is focused on long-term investments in growth-oriented businesses in India, Indonesia, Malaysia and Singapore.

On the challenges in the SME sector, Narayan said the "differentiation and lack of innovation (in manufacturing and service sectors) are areas needing improvement." The IT industry continues to attract investors mainly due to its strong culture of innovation. A senior official from a PE fund said "enterprises can attract investors provided they can showcase what unique advantage they can bring to the table."

For instance, in the consumer segment the food space is growing, with the branded ready-to-cook segment attracting interest. Companies that are in the B2C segment or in the Internet space - where smaller companies can make a difference - have been attracting investor interest.

Inadequate financing and market linkages constrain the growth of MSMEs. Financial institutions meet only one-fourth of the financing demand of micro, small and medium enterprises in India, and a sizeable part of this unfulfilled opportunity is viable, according to a study jointly undertaken by the International Finance Corporation and the Japanese government.

The study estimates the overall funding shortfall for MSMEs at over $400 billion. Formal sources are able to channel only $140 billion to MSMEs.