Dynamics & Trends of the Indian Private Equity Market

Transcription

1 Dynamics & Trends of the Indian Private Equity Market September, 2007 Gateway Room, Taj Mahal Hotel, Mumbai, India A Special Event Hosted by Thomas Weisel International Thomas Weisel International hosted a special event on India s private equity market that took place on September 13 th and 14 th, 2007 in Mumbai. This event gathered many international and national investors, limited partners, general partners, entrepreneurs, advisers and financial partners, with a view to present and discuss the current Indian private equity market. The event was an opportunity to answer a number of questions that participants had about India and the Indian private equity market in particular 1. It was also an opportunity for clients and contacts of Thomas Weisel network to connect during this two-day event and meet some of the key players of the local private equity industry. The sessions allowed presentations from key partners of Thomas Weisel International, including Luis Miranda, President and CEO of IDFC Private Equity, Saurabh Srivastava of India Venture Capital Association, Vani Kola of NEA-IndoUS Ventures, as well as Arun Natrajan of Venture Intelligence. As a summary of the discussions that took place, there seems to be a consensus that India s private equity market is still experiencing record growth, and will continue to grow to record levels in the near future. Based on a number of industry estimates, Thomas Weisel International s market scenario is that private equity investments in India will reach at least $23 billion in However, as the private equity market matures, the industry is changing and is reaching new sectors, as well as new types of deals and opportunities. While infrastructure investments appear as a fantastic opportunity for the decades ahead (according to industry estimates, the need for infrastructure investment in India is close to $445 billion), more targeted niches also appear as attractive areas for private equity investment. 1 Some of the key questions asked by the participants and discussed during the sessions are presented in Appendix A.

2 It appears that in order to take advantage of India s fantastic growth story over the next few years, investors will need to select the most promising managers and focus on those who can add significant value to their portfolios. Highlights of the key sessions and discussions included: Strong macroeconomic outlook Current GDP of over $1 trillion and the 12 th largest economy in the world Macroeconomic outlook remains strong for India, with GDP growth of 9.4% in , and India expected to be the 4 th largest economy by Regulatory framework is undergoing an evolution to adapt to the changing face of Indian industry, so whilst it is considered liberal in some sectors, it still needs to modernise in others Private equity has passed $10bn mark in 2007 Private equity in India started in 1975, and took off in 1996 when international Private Equity firms started to invest in India Private equity investing started to surge in Over $7.46 billion was invested in 2006 and over $10 billion has been invested in 2007 (as of Q3 2007). The average size of transactions was $25 million in 2006 and a shift towards larger growth financing and buyouts will continue over the next few years. Thomas Weisel International expects Indian private equity investments to reach $23 billion by Figure 1 Private equity disbursements in India (number of deals and value of investments) 400 7,460 8, , ,000 Number of Deals ,183 1, , ,000 4,000 3,000 2,000 1,000 0 Value of Deals (USD million) Number of Deals Value of Deals Source: Evalueserve, IVCA, Venture Intelligence India The Indian private equity market consists of over 360 firms currently operating, and industry estimates are that another 50 firms are planning to start operations and raise funds soon. The total pool of funds available for investment is now close to $50 billion (excluding captive corporate allocations) Is the Indian market overcrowded? Thomas Weisel International estimates that India can absorb well over $60 billion in private equity investments over the next three years, not counting infrastructure investments (see below).

3 Private equity is moving beyond technology and IT The landscape is changing As India s private equity market is growing, PE investments are moving beyond India s traditional VC sectors (technology, telecom and IT), with a focus on infrastructure, as well as sectors such as healthcare, consumer-retail, media, manufacturing and industrial growth IT and telecom accounted for 28% of all investments in 2006, down from 66% in Traditional sectors such as manufacturing and industrial sub-sectors offer attractive returns and investment opportunities. Emerging sub-sectors or market niches capturing the interest of investors include airline maintenance and vocational training Investment activity has been traditionally limited to urban areas but the next big wave of opportunities are expected to emerge from rural areas Focus on company management is the key to identifying good investments Family-owned businesses form a large section of Indian growth capital deal flow and involve a large amount of hands-on "corporatization" activities both pre and post investment The search for qualified suitable manpower is one of the primary issues that funds help portfolio companies with (across sectors, from construction to financial services). More and more talent from abroad is coming into India. During a presentation on the private equity landscape in India, Arun Natrajan of Venture Intelligence India provided an update on the Indian private equity market, and presented a chart of the competitive positioning of key players (see Figure 2, below). As the average size of deals continue to increase, India-focused PE funds (ICICI Venture, IL&FS, IDFC, ChrysCapital, Kotak, UTI, Baring, India Value Fund Advisors, etc are now managing larger funds in order to be able to compete with the larger international private equity groups (Warburg, Temasek, Actis, KKR, 3i, Carlyle, etc) on the top end of the market. Figure 2 Private equity Landscape in India (Source Venture Intelligence )

4 India s infrastructure: the $445bn opportunity Entrepreneurial India Luis Miranda, President and CEO of IDFC Private Equity, the mid-market infrastructure specialist fund manager, led a session on India s infrastructure. Infrastructure is currently the single sector attracting the most capital and interest from international investors. Investors interest in Indian infrastructure began with the Indian Finance Minister's 2006 announcement that the sector was in need of $150 billion in investments. Independent revised estimates put India s infrastructure investment requirements close to $445 billion. It was estimated that one-third of $445 billion requirement would be funded through debt, Public Private Partnerships (PPP) and budgetary support Areas of the Indian Infrastructure that require the most attention and investment include power, roads, railways, telecom, airports & sea ports "Soft" infrastructure segments in need of funding include education, food and hospitality sector, water, and waste management. It was observed that there are more quality hotel rooms in Las Vegas than in the whole of India. In certain areas, the land costs in India can be more than the Las Vegas strip. One significant difference between India and other markets is that Indian companies look for initial funding much later than in other countries; Venture capital is easier to procure for first time entrepreneurs compared to few years ago. However, seed funding (below $1 million) remains an underserved niche. Venture capital firms are now increasingly focusing beyond the traditional IT and IT-related sectors to include sectors such as consumer, mobile application, biotech, financial services, and supply chain management. Customization of technology to suit local culture and practices is what the funds looking for as a differentiator compared to plain replication technology from abroad. Entrepreneurs need to equally focus on funding and expertise. This is being made available at the time of investment. Companies should also look to build an Advisory Board to provide advice and contact network that a growing company requires. Contact: KV Dhillon kdhillon@tweisel.com Anand Sunderji asunderji@tweisel.com Preeti Nambiar pnambiar@tweisel.com James Thomas jthomas@tweisel.com Pranav Bhuta pbhuta@tweisel.com Thomas Weisel International 55/56 Free Press House 215, Free Press Journal Marg Nariman Point Mumbai Tel - (91-22)

5 Appendix A Key Questions Asked India Growth Story and Legal, Fiscal and Regulatory Environment - What are the guidelines set by the Reserve Bank of India with respect to hedge funds and private equity funds in India? - What is the current applicable regulatory framework applicable to different asset classes? - What is existent tax regime and jurisdiction applicable for funds based out of Mauritius/Cyprus/Isle of Man, as opposed to India. What are the possible changes to the law structure can be expected in the near future? - What are the regulations regarding repatriating profits out of the country? - How has the Indian private equity and public market changed over the last two years? Infrastructure An overview of trends and dynamics in the infrastructure market - What is the state of hard infrastructure of India today? Is the increase in need of investment in the infrastructure front an opportunity or a debacle? - What is the government stance on the infrastructure projects and private participation in development of these projects? - What is the state of Airport modernization projects around India? - What are the other main areas of development that the government is focusing on? - What are the steps taken by the government for the development of the road network and the ports around India? Meet the Growth Capital Managers - Why are there constraints in generating constant deal flow from sell-side firms for quality target companies? - What are the expectations on the quality and valuation of the companies? Are the deals overvalued/over-priced? - Which are the niche/growth segments to invest in India? - What are the focus segments between the small and medium enterprises? - Has it become difficult to scout deals for funds who invest in below $10 million?