PE, VC investments in small units rise 29%

Investors are bullish about this segment and the growth potential remains strong, say industry experts

Private Equity (PE) and venture capital (VC) investment rose by 29 per cent to $648 million (around Rs 2,916 crore) in the period January-September 2011, compared to $500 million (around Rs 2,250 crore) in the corresponding period of 2010. The number of deals rose by 21 per cent during this period.

Industry experts said investors are bullish about this segment and the growth potential remains strong in the SME sector. According to industry estimates PE players have lined up almost $1 billion to be deployed in India.

With a fast-growing market, increased consumer presence and a growing middle class, India is fast becoming a ground for new business start-ups. Previously a heavily regulated economy, India has started to allow more foreign investment, and has become one of the fastest-growing economies — as well as being one of the four BRIC nations. As a result, investments in Indian start-up companies have started increasing steadily and are growing faster.

According to data compiled Chennai-based research firm Venture Intelligence, investors have injected $648 million, from January 2011 year till date, as compared to $500 million in the year-ago period. The number of deals reported this year is 115, compared to 95 in the year-ago period — an increase of 21 per cent.

Investments were led by the information technology (IT) and IT-enabled services (ITES) sector which witnessed 62 deals, with a total investment of $323 million (around Rs 1,453.5 crore), followed by the energy sector with $93 million in investment.

Some major deals include $20 million by Tiger Global in Flipkart in June 2011; $20 million by Intel Capital, Nexus Ventures and others in Kaltura in February 2011; $20 million by International Finance Corporation (IFC) in NSL Renewable Power; $18 million by IDFC PE in Green Infra in August 2011; and $16 million by Tiger Global and Accel India in Exclusively.in during May 2011.

While SMEs are considered key players in the growth of the Indian economy, access to finance for funding growth has been a constant and major challenge for them. Their fund requirements are too large for microfinance institutions, but commercial banks consider them a risk. It is this funding gap that PE and VC funds address.

SMEs are typically promoter-or individual-driven and, in many cases, are led by first-generation entrepreneurs. Many of these companies are very competitive and have, over the last few years, capitalised on opportunities that have presented themselves.

The sector has traditionally depended on bank loans, but bankers have curtailed lending to SMEs due to the greater risk of non-performing assets (NPAs) in a downturn. Moreover, large firms that raise funds through both the capital market and banks have turned increasingly to banks, ever since the capital market crashed at the beginning of 2008 - thereby offering banks a line of business that is more lucrative than lending to SMEs, said industry representatives.