'PE firms could have a strong year with their 2013 investments'

It has been bad news all the way for the Indian economy since the beginning of 2012 - high inflation, low growth, high interest rates, a sliding rupee. The same should have held true for the private equity industry. As it is, some 70 per cent of the PE investments made in the 2006-09 period have yet to see any returns.

Yet the PE industry has sprung a surprise by investing $2.4 billion in Indian companies in first six months of 2013, a 14 per cent increase compared to the $2.1 billion in the same period last year.

This is primarily due to the interest of foreign PE funds in this country. Foreign funds seem keen to take advantage of the falling rupee and are pursuing deals actively. Investment by foreign PEs has seen a 40 per cent increase in the first half of 2013/14 from that in the corresponding period last year. In contrast, their Indian counterparts have been sluggish so far with a 27 per cent decline in investments over the same period.

However, investors continue to remain wary of India-focused funds. The first half of 2013 saw just $228 million of fresh capital infused, as compared to $1.6 billion in the same period in 2012. Investors prefer pan-Asian funds which invest across emerging economies in the region instead of a single country like India.

In 2013, KKR's Asian Fund II closed at $6 billion, a record for an Asian fund till date. The attractiveness of pan-Asian funds is expected to continue for a while, at least until a larger proportion of past investments in India are returned to investors.

Investors have every reason to be weary of India. According to the Asia Private Equity Review, private equity funds will have to book an staggering aggregate loss in value of $6.2 billion due to the falling rupee alone, on investments made between 2006 and 2009.

The number of PE funds investing in India has also fallen since the heady days of 2006. At that time it is estimated that some 350 firms were establishing their presence in India. An analysis of the number of private equity firms that have done at least one deal since the start of 2012 indicates that the number is closer to 200 now. There are lesser PE firms competing in the market although competition for good deals still remains high.  

The current economic environment augers well for those private equity firms which have capital to deploy and don't have an overhang of unrealised past investments. More opportunities to invest or buy will emerge as promoters show more willingness to exit businesses which have substantial debt or need capital to sustain and grow.

While valuations remain high currently, continuing pressure on business performance could reduce valuations expectations. Distressed businesses where the underlying business model is viable would be attractive acquisition targets. Private equity firms could very well have a strong vintage year with their 2013 investments.

VIKRAM UTAMSINGH  
MD, Transaction Advisory Services, Alvarez & Marsal India Pvt Ltd