Why PE firms chased fewer deals but invested more money in India in 2013

Private-equity (PE) funding in India is going through a churn with fewer companies attracting higher capital from investors. Data from research firm VCCEdge shows there were 292 PE deals worth $9.2 billion in 2013 . This represents an eight per cent rise in value and a 17 per cent drop in volume from the previous year.

What does this indicate? Some analysts feel this shows the number of businesses worth investing in is shrinking. Given the economic slowdown, a weak rupee and an uncertain policy environment, it's not a surprise fund managers are carefully weighing their investment commitments. Fund managers also say the fall in the number of investable businesses is leading to higher valuations, which is impacting their returns on investment.

Keshav Mishra, Partner at PE firm Baring India, says investors are more cautious than before. "Uncertainty around regulations and policies is adding to the woes of fund managers," he says. He cites the example of the infrastructure sector, which attracted big-ticket investments a few years ago but has lost steam now owing to policy uncertainty. "We are in a wait-and-watch mode," he says. "What initiatives the new government takes would decide the way investors put their money."

{blurb}Some analysts, however, believe the drop in the number of transactions and the increase in value is a sign that investors are looking for better-quality deals and prefer to pump money in mid- and large-sized businesses, rather than small companies. To be sure, the Indian PE market continues to be dominated by minority investments. But the mix is slowly moving towards larger transactions. The largest PE deal in 2013 was Qatar Foundation's $1.26 billion investment in Bharti Airtel, India's biggest mobile-phone operator.

Vikram Utamsingh, Managing Director of the Transactions Advisory Group at professional services firm Alvarez and Marsal, says PE firms are looking at bigger companies because their return on investment in smaller businesses over the past decade fell short of expectations. "There is also a preference to invest in businesses which have had earlier rounds of fundraising either from venture capital or smaller private-equity firms," he says. "This is because these businesses have fewer corporate governance issues and their promoters have demonstrated a positive working relationship with investors and have grown their businesses successfully."