PE investments in SMEs decline 51%

Funds look at big firms where the perceived risk is lower

Private equity (PE) investments in India's small and medium enterprise (SME) sector fell to $151 million in January-February 2013, from $306.27 million in the year-ago period - a decline of 51 per cent. Experts say in the current environment, PEs would look at bigger companies where the perceived risk is lower.

Besides, funds focussed on SMEs are facing difficulty in raising money from investors owing to the prevailing negative sentiment. While the trend is expected to continue for two more years, enterprises that can show differentiation and uniqueness would be able to attract money from PE funds, they added.

The data, compiled by Venture Intelligence, a Chennai-based research firm which tracks PE and venture capital flows into India, showed that in the first two months of 2013, only 18 deals were reported, compared to 28 deals in the year-ago period.

Since SMEs are difficult to define, the data compiled is for investments in early- and growth-stage companies with sales revenues of up to $50 million. (THE FINE PRINT)

In the last four years, 2011 was the best year for the sector, attracting $1,478 million in PE flows across 188 deals, compared to $1,246 million across 159 deals in 2010 and $642 million across 103 deals in 2009.

In 2012, the sector attracted investments totalling $1,184 million across 151 deals - a fall of 19 per cent over 2011.

In 2013, IT and ITES continued to retain the top slot by attracting $46 million across 10 deals, followed by healthcare and life sciences which attracted $42 million across six deals. Shipping and logistics attracted $41 million in one deal and the BFSI space attracted $23 million in one deal.

Karthikeyan Ranganathan, a partner in Baring Private Equity Partners India, said that at present SMEs are going through a rough patch, due to the slowdown. PE funds prefer bigger companies, where the perceived risk is lower. "We have yet to see any profitable exits by investors who have invested during good times," he said. The others hurdles, according to investors and industry experts, are returns not being free of risk, information gaps and difficulties in exiting investments.

While agreeing that the trend of declining investments would continue for the next couple of years, Ranganathan said enterprises can attract investors, provided they can showcase the differentiation and unique advantages they can bring to the table.

For instance, in the consumer segment the food space is growing. Within this segment, branded ready-to-cook products are attracting interest, thanks to uniqueness backed by innovation.

Companies that are in the B2C segment and the consumer internet space, where it is largely smaller companies that can make an impact, have been attracting capital, PE sources said. A senior official from an advisory firm that helps SMEs raise money from PEs said that funds with an appetite for deals of up to $30 million were major contributors to the slowdown in investments.

"PE funds are not able to raise second-round funding from their investors, who have negative perceptions about India," he said. He added that fewer than 20 per cent of the funds that had invested in deals of up to $30 million four or five years ago had made money.