INTERNATIONAL private equity (PE) funds and venture capital (VC) funds are pumping in significant amounts into India, confident that the country would maintain its 8.5 per cent-plus economic growth pace for the next few years.
PE funds invested almost $20 billion in India in 2007, while VC funds brought in nearly a billion dollars. This year, about $25 billion is expected to be injected into the country by PE funds. All the leading international PE funds have been active in India in recent months; they include the Blackstone group, Goldman Sachs, Warburg Pincus, the Carlyle group, Kohlberg Kravis Roberts & Co (KKR), Citigroup and Actis Capital, besides two leading funds from Singapore, GIC and Temasek Holdings.
Last year, nearly 400 PE deals were struck by these international funds, aggressively buying into companies showing promise in sectors like information technology, biotechnology, healthcare, telecommunications, media and entertainment and real estate and retailing.
One of the most significant PE deals to have taken place recently was the $1.25 billion investments by PE funds in Bharti Infratel, part of Bharti Airtel, India’s leading integrated telecommunications service group. Funds like Temasek, Goldman Sachs, Citigroup, AIF Capital, Investment Corporation of Dubai, Macquarie and India Equity Partners invested $1 billion in Bharti Infratel, while KKR ploughed in a quarter billion dollars last month.
Similarly, another billion dollars were invested in Idea Cellular by funds like TA Associates, Citigroup, GLG Partners, Sequoia, ChrysCapital and Providence Equity Partners.
Goldman Sachs, the US finance major, is now beefing up its presence in India and looking at various options, including setting up an asset management company, a brokerage unit, wealth management division and a commodities outfit. It is also keen on setting up a non-banking finance company.
According to Brooks Entwistle, managing director and chief executive, Goldman Sachs India, the group is building up its operations in India with a long-term view. The firm is awaiting approval from the Securities and Exchange Board of India (SEBI), for its asset management company.
Most of its PE investments in India have been small so far, but Goldman Sachs is preparing for big ticket investments over the next few years.
Besides American and Europe PE majors, other smaller private investors are also striking smaller deals, especially in the real estate and hospitality sectors. Pragnya, a Mauritius-based PE fund, recently invested $40 million in real estate projects in India. The fund, which hopes to invest a total of $100 million-plus in the realty sector in India, is planning to raise an additional $150 million for investments in the hospitality sector.
Another relatively small PE investment was by Red Fort Capital, which plans to take a nearly $10 million exposure in the realty sector.
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INDIA’S largest commercial bank, State Bank of India, is also entering the PE segment. The bank is likely to pick up a nearly 20 per cent stake in Sage Capital Funds Management, an asset management company floated by Sage Capital. The company has launched a $200 million value fund that will invest in Indian companies.
SBI chairman OP Bhatt is keen on a foray into the PE sector, and is willing to allocate about Rs50 billion for the purpose. Indian banks, which are active in mutual funds and venture capital funds, have generally kept away from PE funds. ICICI Bank, the largest private bank – and the second largest bank in the country – has been an exception, and has a vibrant PE unit. Its ICICI Ventures is the largest PE firm in India.
But many private Indian business groups are also setting up private equity funds and venture capital funds. They include the Anil Ambani Dhirubhai group, the Aditya Birla group and the Future group.
ICICI Ventures recently set up India’s first ‘mezzanine’ fund, the India Advantage fund VII, raising about $110 million in the first round. While PE funds acquire equity in a company, mezzanine funds opt for a combination of debt and equity, ensuring a steady income flow for the funds.
Mezzanine funds are popular in many Asian markets, though they are new to India. Other PE funds are also planning to launch similar debt-equity combinations in the domestic market. The PE unit of Franklin Templeton Investment has also launched a mezzanine fund, while others are also toying with the idea of setting up similar funds.
International funds are also eyeing acquisitions in brokerage units in India. New Vernon Private Equity of the US and the UK’s 3i Group, for instance, are in talks with AnandRathi Securities. They plan to invest about Rs.4 billion in the firm. AnandRathi Securities had recently raised a billion rupees by divesting a party of the equity to Citigroup Venture Capital.
New Vernon has already picked up equity in two other securities firms: Prime Securities (in which it acquired a 10 per cent stake for Rs.550 million) and Motilal Oswal, in which it invested nearly $30 million with Bessemer Venture Partners.
Other leading stock broking units in India have also been attracting PE investors. Sharekhan, for instance, recently sold a large stake to Citigroup Venture. Karvy got about Rs5 billion from Barings and ICICI Ventures, Prabhudas Lilladher sourced $10 million from a US investor, while Geojit Finance sold equity worth over Rs2 billion to BNP Paribas. Several other smaller firms have also raised funds by selling their equity to international and domestic PE funds.
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VENTURE capital funds have also been making waves in India in recent months. According to the India Venture Capital report by Dow Jones VentureSource, VC funds invested $928 million in 80 Indian firms in 2007, as against $350 million in 36 deals in 2006.
The information technology sector attracted $384 million of VC funding, says Jessica Canning, director of global research, Dow Jones VentureSource. Web-related and consumer and business services companies accounted for more than half of all VC deals in India, she says.
Another $346 million was invested in the business, consumer and retail segments. The healthcare sector also attracted nearly $100 million in VC funding. “Service-oriented companies in India – both in the technology fields and the non-technology areas of hotels, taxis and similar services – continue to attract investment and this is likely due to their low capital requirements as well as to the rapidly emerging nature of the broader Indian economy,” adds Canning.
According to her, this is just the beginning for the VC market in India. “In 2007, 79 per cent of all deals in India were for seed and first rounds and a lot of these companies will continue raising venture capital as they progress toward profitability and liquidity.” And because the majority of investment is going to early-stage companies, “we aren’t seeing ballooning deal sizes like those in the US and Europe where investors are focused more on later-stage companies,” notes Canning.
The median size of a VC round for companies in India was $9 million in 2007, up from $8.7 million in 2006, but lower than $18.8 million median in 2005. Almost 75 per cent of the companies that got VC funding were generating revenues or were profitable.
Besides international funds, even domestic players are getting into the VC mode. SBI’s subsidiary, SBI Capital Markets, is planning to set up a $100 million VC fund to invest in knowledge-based sectors. ICICI Bank has had a lead in this sector, having set up a VC unit much earlier.
SBI Capital Markets has entered into a 50:50 joint venture with Japan’s Softbank Investment Holdings for the new fund. The India Knowledge Fund will be geared to meet the needs of the IT, ITES, telecommunications, clinical research outsourcing, environmental technology and alternative energy sectors. It will invest in unlisted, high-growth companies, with initial investments ranging from $3 million to $10 million.
The Insurance Regulatory and Development Authority of India now plans to allow even insurance companies to invest up to five per cent of their investible corpus in VC funds that invest in infrastructure projects. For the PE and VC funds sectors in India, the good times – and the big backs – are rolling in.
INTERNATIONAL private equity (PE) funds and venture capital (VC) funds are pumping in significant amounts into India, confident that the country would maintain its 8.5 per cent-plus economic growth pace for the next few years.
