SMEs see a 43% fall in PE investments in Jan-Mar

Industry experts say this is a temporary and expect investments totalling $25-30 billion to flow into India over the next few years

Private equity (PE) investments in India’s SME sector dropped by 43 per cent to $134 million in 2012 (January to year till date) from $236 million in the corresponding period of 2011. The number of deals fell by 34 per cent during this period.

Industry experts said this was a temporary phenomenon and small companies catering to domestic demand would attract more PE investments.

They noted that, recognising the potential of the sector, the finance minister had enhanced the availability of equity to the MSME sector by announcing a proposal to set up a Rs 5,000 crore India Opportunities Venture Fund with the Small Industries Development Bank of India (Sidbi) in the 2012-13 budget.

According to data compiled by Venture Intelligence, a Chennai-based research firm, some of the major deals that have been struck so far this year include an investment of $20 million by IDFC PE and MCap Fund Advisors in ReGen Powertech in February; and $18 million by Gaja Capital Partners in Carnation Auto, also in February.

Among the major deals struck in January-March 2011 include $20 million invested in Kaltura by Intel Capital, Nexus Ventures and others in February; and $16 million by NEA and Headland Capital in ValueFirst, also in February.

Robust economic growth has made India an attractive market for PE players. Industry sources said that PE funds totalling $25-30 billion are expected to flow into India over the next few years. They added that earlier, SMEs feared they would lose their independence and control over their companies if they accepted PE investments.

The other significant challenges for PE funds over the next 12-18 months, according to the Protiviti AVCJ survey include exiting existing investments, finding quality investment opportunities, the uncertain regulatory and reform scenario and economic uncertainty.

A senior official from a PE firm said that over time the reluctance of SMEs to sell equity has declined, and they are now welcoming PE firms. This is not only because banks – earlier the only institutional source of capital – fear that loans to SMEs would turn sticky, but also because SMEs have realised that PE firms not provide funding as well as help them run their companies.

Management teams in SMEs are beginning to realise that growth plans can only be put on hold for so long. Those that are doing well and outperforming their peers are accessing investment capital to fund expansion and build competitive advantage.

PE sources said they are interested in companies that have opportunities to grow and are managed by experienced teams, who are capable of turning their business plans into reality. Investors look for an exit at some stage.

This could mean growing the business to a size whereby money could then be raised through traditional finance to buy out the equity investor.