• Opportunities

Sasha Mirchandani, seated in his fifth-floor office that overlooks the Arabian Sea in Mumbai’s Makers Chambers, looks like a man in a hurry. This is despite the fact that his main job—picking promising companies, investing in them and mentoring them—is currently on a downhill in India, just like it is elsewhere in the world.

Mirchandani heads the Indian operations of BlueRun Ventures, a fund with over $1 billion under its management, and spearheads Mumbai Angels, a Mumbai-centric group of angel investors. According to him, private equity in India is dead and venture investments far and few.

He is not an exception. Most Indian investors, like their counterparts across the globe, are making fewer investments. Instead, they are spending time managing their existing portfolios and trying to make them work. And they are busy evaluating exit options.

According to research service Venture Intelligence, the total number of deals in India by venture capital funds and private equity firms in 2008 was 581, as against 626 in 2007. Total investment by these funds also plummeted to $11.612 billion in 2008 from $15.6 billion. The average VC deal size also fell to $5.6 million last year from $6.19 million in 2007, while the average PE deal size came down to $24.68 million from $30.92 million.

In the last 12 months, half of these investments in India have been made by global funds, commanding 60 percent of the value of these deals. The largest deal in 2007 was the $1 billion joint investment by Tamasek Holdings and Goldman Sachs in Bharti Infratel. Compared to this, the biggest deal in 2008 was the $428 million investment by Providence Private Equity in Aditya Birla Telecom.

The quantum of investment, both in numerical and value terms, has indeed dipped since 2008. At the end of the third quarter of 2008, there were 365 PE deals worth $9,479 million, as compared to 14 deals worth $2,360 million during the corresponding period this year.

The largest investment during Q3 ‘09 was the $255 million investment by KKR (along with one of its LPs) to buy out Flextronics’ residual stake in telecom software services firm Aricent. The deal accounted for a third of the value of investment during the period ($763 million across 47 deals).

Led by the KKR-Aricent deal, the IT & ITES industry registered 12 deals worth $340 million in Q3 ’09, followed by BFSI (eight deals worth $101 million). Shipping, logistics, healthcare, life sciences and manu-facturing attracted five investments each during this period. Education companies followed, attracting three investments worth $35 million. “In fact, education and logistics services stand out as the sectors that continue to witness quarter-on-quarter growth in investor interest,” remarks Arun Natarajan, CEO, Venture Intelligence.

Venture capital funds are not unhappy about the dwindling investment scene, though. They see two positives in this. First, valuations of companies have come down; second, it gives them extra time to manage and reinvest in their existing investments. Investors have poured in almost $40 billion in around 1,500 Indian companies in the last five years.

“We are taking longer to invest. Money is not in abundance. Deals are far and fewer,” says Ashish Dhawan, managing partner at Chrys Capital. Since most funds have not invested in fresh promoters, second-round funding has had a boost to some extent, say industry experts. However, with investors being wary of further investments in emerging markets till conditions stabilize, these second-round fundings have not been substantial, either.

In 2007, there were too many funds chasing a handful of good deals, resulting in inflated valuations of companies seeking funds. This, in turn, meant that though funds were being dispensed, there were just a few companies that were hogging most of it. “Even now, it has become very difficult to convince companies that their valuations were less than 25 percent of what they were a year ago,” says Mirchandani.

This will be good for funds as well as promo-ters in the mid term. Investors will be able to hedge through investments in a bigger portfolio basket, while more companies will receive funding. As of now, even promoters have postponed fund-raising in most cases. The early stage funding scenario is especially bleak, as investors and promoters alike agree.

“Infrastructure in general, including in the fields of energy and telecom, became unpopular with investors in the last six months of 2008, while education and healthcare gained favor. Among the financial services, microfinance was a favorite with investors during this time,” says Natarajan. Certain sectors have been hit worse than others. In the real estate sector, investments in the first three months of 2008 was Rs. 7,285 crore, which came down to Rs. 6,286 crore in the last three months of 2008.

The biggest gainers were media companies, biotechnology firms and industries, clocking a growth of 84 percent, 58 percent and 34 percent in funding between March and December 2008. Interest in information techno-logy and telecom companies seemed to have plateaued off, with both sectors enjoying a mere 5 percent growth in funding. The pharma sector suffered a 16 percent dip in funds, while real estate funds dropped by 14 percent. The overall growth in funding during this period was 10 percent.

This is also a good time for buyout firms, as companies are hiving off non-performing assets to curb losses. These can now be picked up at reasonable rates, with chances of reaping benefits on them once market conditions stabilize. Investors are also faced with another bleak situation: most don’t have an exit option in the immediate future. According to SEBI data, only four draft initial public offer (IPO) proposals were filed with it by the end of March 2009, as against 25 a year ago. This is cause for major worry for venture capitalists who depend on such public offerings to make money off their investments.

Some are of the view that funds raised abroad may flow into India, as there are fewer investment options overseas. This would result from the fact that India offers a relatively stable investment option compared to other markets. “In another six to eight months, we will see investments streaming into India. It may not match the euphoria of 2006 and 2007, but there will be improvement,” says Rajiv Memani, country managing partner, Ernst & Young.

The fact that venture capital firms are now slower to invest cash could actually be a good thing. Startups that offer incremental and non-disruptive solutions are likely to receive funding, and attractive companies will continue to get capital. Plus, company valuations are currently low, offering investors a good deal, as there are more talented people in the market now to start out or work at young companies.

Tags:
BlueRun Ventures, Mumbai Angels, private equity, Sasha Mirchandani, venture capital market, Venture Intelligence