rNOVEMBER 2013 · 2016. 2. 22. · According to The Global Venture Capital and Private Equity Country Attractiveness Index 2012 by IESE, India is ranked 32 among 116 countries and

Neeraj.AryaText BoxTHE LURE OF INDIA: ONE OF THE WORLD'S MOST EXCITING MARKETS FOR PE AND VC

Neeraj.AryaText BoxNOVEMBER 2013

Neeraj.AryaText Box1.1 Traditional sources of financing in India

Neeraj.AryaText Box1.2 Emergence of PE & VC in India

Neeraj.AryaText Box........................................................................3

Neeraj.AryaText Box1. FINANCING BUSINESS ACTIVITIES IN INDIA

Neeraj.AryaText Box2. INDIA'S SUSTAINABLE LONG-TERM GROWTH ATTRACTING PE & VC

Neeraj.AryaText BoxINVESTMENTS .............................................................................................................................6

Neeraj.AryaText BoxCONTENTS

Neeraj.AryaText BoxTHE LURE OF INDIA: ONE OF THE WORLD'S MOST EXCITING MARKETS FOR PE AND VC

Neeraj.AryaText Box....................................................................3

Neeraj.AryaText Box...................................................................................4

Neeraj.AryaText Box1.3 PE & VC inflow over the years

Neeraj.AryaText Box.....................................................................................5

Neeraj.AryaText Box2.2 A domestic demand-driven economy

Neeraj.AryaText Box......................................................................8

Neeraj.AryaText Box2.3 Infrastructure development gathering momentum

Neeraj.AryaText Box ............................................10

Neeraj.AryaText Box2.5 Conducive investment climate

Neeraj.AryaText Box2.6 A culture of entrepreneurship

Neeraj.AryaText Box3.1 Identifying the right business opportunities across the country

Neeraj.AryaText Box.................................................................................11

Neeraj.AryaText Box................................................................................12

Neeraj.AryaText Box.......................13

Neeraj.AryaText Box3.2 Exit opportunities

Neeraj.AryaText Box ........................................................................................................16

Neeraj.AryaText Box2.1 Working toward a faster growth rate

Neeraj.AryaText Box.......................................................................7

Neeraj.AryaText Box3. ROAD AHEAD FOR PE & VC INVESTMENTS IN INDIA

Neeraj.AryaText Box.......................................................13

Neeraj.AryaText Box3.3 Differentiation of PE investment in India from the Western world

Neeraj.AryaText Box....................17

Neeraj.AryaText Box2.4 High savings and investment rates

Neeraj.AryaText Box ..........................................................................10

Neeraj.AryaText Box4. CONCLUSION

Neeraj.AryaText Box...............................................................................................................................18

The Lure of India: One of the World’s Most Exciting Markets for PE and VC 3

……………………………………………………………………………………………………………………………………………...........................

1. FINANCING BUSINESS ACTIVITIES IN INDIA Indian companies have traditionally resorted to bank credit and capital markets (equity or debt) to fund their capital needs. Though private equity and venture capital (PE & VC) funding was formally introduced in the country in the 1980’s, capital raising via alternative financing routes picked up only post 2003. India is now a favoured PE & VC investment destination (especially in Asia Pacific) driven by its consumer-driven high economic growth. PE & VC funds have invested around US$ 82 billion over 2003-12. 1.1 Traditional sources of financing in India The banking sector and capital markets offer long-term financing to companies. Bank credit to the agricultural (including allied services), industry and services sectors has increased at an annual average of 20.8 per cent to US$ 889 billion1 over FY 2007-13. The growth was primary driven by higher credit to the industry (up by 22.2 per cent annually) and services (19.4 per cent) sectors. Indian companies also rely on capital markets for funding. Total capital raised through equity (IPO) and debt (issuances) increased by 25 per cent annually over FY 2003-12 from US$ 0.9 billion to US$ 6.9 billion2. Of the total, equity issuances were the dominant source of financing. However, the volatility in equity markets over the past three years has led to a rise in debt issuances. During FY 2012-13, debt accounted for 64 cent of total capital raised.

Figure 1 Capital raised through equity and debt

Source: SEBI, Aranca Research

1RBI 2SEBI

0

5

10

15

20

25

FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13

Equity (US$ billion) Debt (US$ billion) Others (US$ billion)


……………………………………………………………………………………………………………………………………………...........................

Figure 2

Development of Indian equity market

Source: NSE, Aranca Research Despite well-developed capital markets, high-growth companies require alternative funding. Financing is a key challenge for most start-ups after the initial year or two. Promoters may not be eligible for cost-effective loans from the banking system. Since such companies are small and lack a track record, it becomes quite difficult for them to tap into capital markets. Meeting regulatory requirements for an IPO/debt issuance is also a costly affair. Alternative financiers such as venture capital and private equity funds bridge this gap. In addition to financing, the added advantage of management expertise makes alternative financing a suitable avenue for companies in the growth stage. 1.2 Emergence of PE & VC in India The history of the private equity and venture capital industry in India can be traced back to 1984, when ICICI initiated its venture capital scheme to promote private sector companies, especially in the emerging technology sector. This move was later followed by others such as IFCI and Canara Bank. Following the increasing popularity of PE and VC, the Securities and Exchange Board of India formed the SEBI (Venture Capital Funds) Regulations, 1996, which were later amended in 2000. During 1995-2000, India witnessed an inflow of many foreign PE firms such as Draper International, CDC Capital, HSBC Private Equity, Baring Private Equity Partners and Warburg Pincus. Consequently, SEBI introduced the Foreign Venture Capital Investors (FVCI) Regulations in 2000; it allowed foreign funds to register with the SEBI and helped them avail of benefits that were not allowed under the FDI route. These included exemption from lockup of shares held by registered PE investors and from valuation norms, which allowed investors to invest/exit from stakes in private unlisted firms at valuations, which they believed were appropriate.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

1,200

1,400

1,600

FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13

Market cap (US$ billion) Companies listed on NSE (RHS)


……………………………………………………………………………………………………………………………………………...........................

Table 1 India ranks high in attractiveness for PE/VC funds on several parameters

Ranking by China India Thailand Brazil Russia Indonesia Vietnam

Economic activity 1 2 38 8 7 4 30 Capital markets depth 7 12 21 20 36 28 35

Taxation 27 97 48 74 65 91 113

Corp. governance 48 51 54 73 90 101 104 Human/social environment

54 52 49 77 95 72 70

Entrepreneurial culture

23 59 52 47 33 79 71

Overall ranking 22 32 34 36 43 55 63

Source: The Global Venture Capital and Private Equity Country Attractiveness Index report 2012, Aranca Research 1.3 PE & VC inflow over the years PE investments in India reported the most remarkable growth during 2003-08 when global PE firms had access to abundant capital; following upbeat equity markets, low interest rates and easy credit conditions in developed economies. Total PE dry powder capital increased from US$ 403 billion to approximately US$ 1 trillion over 2003-073. High-growth markets, including the BRIC nations and other Asian economies, attracted the attention of PE firms during the same period. The high-growth period in PE investments in India came to a pause in late 2008, following the sub-prime mortgage crisis and global financial downturn that impacted credit markets. Total value of PE investments declined by about 70 per cent in 2009 to US$ 4.5 billion, as the number of deals fell to 216 in 2009 from 448 in 20084. The lack of PE investors’ interest and reluctance of Indian promoters to sell stakes at lower valuation slowed down the pace of PE and venture capital deals. With improved global conditions and recovery in the Indian markets, PE investors returned, but with a more cautious approach. The total investment value (for PE and VC deals) declined in 2012 to US$ 10.2 billion compared to US$ 14.8 billion in 2011 and US$ 9.5 billion in 20105. The decline is attributable to a difficult investment atmosphere globally and a slowdown in India’s economic growth6. However, interest remains strong as indicated by deal volumes; Total number of deals during 2012 increased to 551, from 531 in 2011 and 380 in 2010. India continues to remain an attractive investment destination for PE and VC firms compared with a number of other emerging economies. According to The Global Venture Capital and Private Equity Country Attractiveness Index 2012 by IESE, India is ranked 32 among 116 countries and is placed above 3India Private Equity 2011, Bain & Co 4India Private Equity 2011, Bain & Co 5India Private Equity 2012, Bain & Co 6India Private Equity 2013, Bain & Co


……………………………………………………………………………………………………………………………………………........................... other emerging markets.

Figure 3 PE & VC investments in India

Source: Bain, Aranca Research

Figure 4 Average deal size of investments in India

Source: Bain, Aranca Research

2. INDIA’S SUSTAINABLE LONG-TERM GROWTH ATTRACTING PE & VC INVESTMENTS India has emerged as the world’s third-largest and second-fastest growing economy, growing at an average of 7.7 per cent over FY 2003-127. This was much higher than the global economic average of 4.3 per cent over the same period. India's economic momentum during FY 2003-12 has helped the country 7RBI Handbook 2012

0

100

200

300

400

500

600

0

10

20

30

2004 2005 2006 2007 2008 2009 2010 2011 2012

Value (US$ billion) Volumes - RHS

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011 2012

Average deal size (US$ million)


……………………………………………………………………………………………………………………………………………........................... move up to the third rank globally in 2012 from fifth in 20038. The services sector has been the primary growth engine of India’s success. The sector’s share of total gross domestic product (GDP) increased to 66.8 per cent in FY’12 from 59.3 per cent in FY’039. The services sector reported an annual growth of 9.6 per cent during FY 2003-12. The industrial (19.2 per cent of GDP in 2012) and agricultural (14.0 per cent) sectors have also contributed to GDP growth, but at a slower pace. 2.1 Working toward a faster growth rate India’s economy was relatively less affected by the global economic recession. Although the economic momentum did slow down, the country’s GDP still grew by a robust 6.7 per cent in FY’09. The economy was back on track in FY’10, growing at 8.4%. However, continued global headwinds, coupled with high inflation and interest rates, hit economic growth rate, especially in the manufacturing segment, in the past two years.

Figure 5 India outpacing global economic growth (real GDP growth %)

Source: RBI, IMF, Aranca Research In response to the slowdown in growth, the government has introduced forward-looking reforms to attract domestic and foreign investments in order to revive growth. It recently increased the foreign direct investment (FDI) limit to 100 per cent in single-brand retail and cash-and-carry (wholesale) trading and exports. For multi-branded retailing, the government eased the mandatory 30 per cent local sourcing norm by retaining it for only the initial period of the business and has permitted states to allow multi-brand retailing in cities with population of less than 1 million. The government also increased FDI limits in the telecom services sector and asset reconstruction companies from 74 per cent to 100 per cent and FDI up to 74 per cent in credit information companies from an earlier 49 per cent. Though the 8GDP at purchasing power parity 9All GDP data sourced from the Reserve Bank of India excluded ‘Errors and omissions’

4% 4%

8% 7% 7%

5%

9%

5%

10%

5%

9%

5%

7%

3%

8%

-1%

8%

5%

6%

4%

5%

3%

-2%

0%

2%

4%

6%

8%

10%

12%

Ind

ia F

Y'0

3

Wo

rld

(2

00

2)

Ind

ia F

Y'0

4

Wo

rld

(2

00

3)

Ind

ia F

Y'0

5

Wo

rld

(2

00

4)

Ind

ia F

Y'0

6

Wo

rld

(2

00

5)

Ind

ia F

Y'0

7

Wo

rld

(2

00

6)

Ind

ia F

Y'0

8

Wo

rld

(2

00

7)

Ind

ia F

Y'0

9

Wo

rld

(2

00

8)

Ind

ia F

Y'1

0

Wo

rld

(2

00

9)

Ind

ia F

Y'1

1

Wo

rld

(2

01

0)

Ind

ia F

Y'1

2

Wo

rld

(2

01

1)

Ind

ia F

Y'1

3

Wo

rld

(2

01

2)


……………………………………………………………………………………………………………………………………………........................... FDI limit in the defence sector is maintained at 26 per cent, higher investment for “state-of-the-art” technology could be considered with the approval of Cabinet Committee on Security. The government has also allowed up to 49 per cent FDI in the aviation sector and raised the limit for foreign investments in the insurance sector to 49 per cent from 26 per cent (Parliament approval pending). Additionally, FDI limits are also expected to increase in insurance and pension sectors going forward. The manufacturing sector is receiving special focus. A cabinet committee has been set up to track growth in industrial and infrastructural projects. In 2011, the government introduced the National Manufacturing Policy to boost the country’s manufacturing industry and enhance growth. The policy plans to increase the manufacturing sector’s share of India’s GDP to 25 per cent by 2022 (15.3 per cent during FY’12) and create employment opportunities for over 100 million people. To achieve this, National Investment and Manufacturing Zones (NIMZs) would be developed through greenfield industrial township projects. India’s long term growth outlook remains strong. As per data from an OECD report last year, India is projected to be the fastest growing economy globally between 2011 and 2060 – growing at an annual rate of 4.9 per cent during the period; and increasing the country’s per capita income by seven-folds. 2.2 A domestic demand-driven economy India is a consumption-based economy. Per capita income has improved at an annual rate of more than 8.8 per cent over 2003-1210. Consumer spending outlook remains positive, with the consumer confidence index at 120 points for Q1 2013 compared to a low of 92 during early 2010. Rising middle-income group A new class of population with the willingness and capacity to demand world-class products and services has emerged as incomes have increased. This emerging middle-class is supporting India’s consumption growth story. India’s middle-income population is expected to reach 583 million by 2025, overtaking that of US and Europe. Positive macro factors that would continue to improve per capita income will help sustain consumption demand from this segment of the population. 10IMF World Economic Outlook April 2013


……………………………………………………………………………………………………………………………………………...........................

Figure 6 Rising share in the world’s middle class population

Source: United Nations, Aranca Research Growing working population India has large pool of people in the working age group. Of the population base of 1.2 billion, around 47 per cent are less than 25 years of age and another 47 per cent are in the age group of 25-64 years.

Figure 7 Break-up of age structure between BRIC nations

Source: IMF, Aranca Research Based on United Nations’ forecasts, India’s working age population (15-64 years) is expected to increase by 163 million between now and 2025. The country is expected to account for more than three-fourths of the rise in global working age population over 2012-25. India’s working age population would further help in creating demand for services and manufactured products.

0%

20%

40%

60%

80%

100%

2009 2020 2030

China India Japan United States Europe Others

0%

20%

40%

60%

80%

100%

Brazil China India Russia US UK

0-24 years 25-64 years 65+ years


……………………………………………………………………………………………………………………………………………........................... Increased urbanisation and improved standard of living Increasing urbanisation and growing awareness of a better standard of living act as catalysts for growth in consumption demand in India. Based on the 2011 Census, 27.8 per cent of the total population lived in urban areas in 2001 compared to 31.2 per cent in 2011. India is projected to account for 15.6 per cent of the 1.4 billion expansion in the global urban population by 2030. Given the expected rise in urbanisation and consumers’ aspirations resulting from improved income levels, consumption demand would remain strong. 2.3 Infrastructure development gathering momentum Infrastructure bottlenecks have been a major hurdle to economic growth in the past. According to economists, India loses about 2 per cent of economic growth due to poor infrastructure. The government has allocated US$ 1 trillion for infrastructure development in its latest five-year plan. At least 47 per cent of this US$ 1 trillion investment is expected to be funded by the private sector. Following the investments in infrastructure, the share of the sector is expected to increase from 7 per cent of the GDP currently to above 10 per cent in the next five years. Recent announcements for infrastructure development include: The government would allow financial institutions to issue US$ 9.2 billion worth of tax-free bonds to

raise investments in the sector. India plans to award contracts for over 3,000 km of road projects across the states of Maharashtra,

Gujarat and Madhya Pradesh during the first half of FY’14. The government would be setting up a road regulator to push development of highways. The

regulator would be addressing issues related to financial stress, construction risks and contract management.

Moreover, the government would be establishing two new ports in West Bengal (at Sagar) and

Andhra Pradesh (location to be decided). There is a huge potential for investments in power generation, as India is estimated to have faced a

peak power shortage of 10.6 per cent during FY’13. India is targeting capacity additions of 76,000 MW in its 12th Five-Year Plan (2012-17) and 93,000 MW in the 13th Five-Year Plan (2017-22). This would require an investment of around US$ 110 billion.

2.4 High savings and investment rates India enjoys high rates of savings and capital formation. The country’s savings rate (gross national savings as a percentage of GDP) is among the highest in emerging economies. It averaged at around 32.6 per cent during 2003-12 and is currently at 29.8 per cent11; this is higher than that of Russia, Brazil and even developed nations such as US and UK. Additionally, investment rate (gross capital formation as a percentage of GDP) averaged at around 34.3 per cent over 2003-12. At 34.9 per cent12 in 2012, 11IMF World Economic Outlook April 2013 12IMF World Economic Outlook April 2013


……………………………………………………………………………………………………………………………………………........................... investment rate remained higher than that of Russia, Brazil and developed nations such as US and UK. Such consistently high levels of savings and investments will help accelerate economic activity.

Figure 8 Savings rates of BRIC nations (%)

Source: IMF, Aranca Research

Figure 9 Investment rates of BRIC nations (%)

Source: IMF, Aranca Research 2.5 Conducive investment climate India remains a top investment destination due to its investor-friendly environment. The country has attracted over US$ 161 billion in FDI and US$ 127 billion in FII over FY 2008-13, as high economic growth, favourable demographics and a business-friendly environment have attracted investor interest. As per World Bank’s Doing Business 2013 report, India scores a six on ten in terms of creating favourable regulations on investment protection; the country also ranked 49th out of 185 nations and

0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China India Russia Brazil

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China India Russia Brazil


……………………………………………………………………………………………………………………………………………........................... was placed higher than other emerging economies. Furthermore, the World Economic Forum ranks India 44th out of 144 countries in terms of strength of auditing and reporting standards. Moreover, the country was ranked 21st in terms of development of its financial markets and was placed higher than other BRIC nations. According to the Economic Freedom of the World 2012 Annual Report, the India was given a score of seven out of ten in terms of providing a favourable tax regime for doing business. 2.6 A culture of entrepreneurship India’s culture of entrepreneurship is a key positive. A well-educated population base has encouraged new ventures, especially in the information technology enabled services (ITES) sector. Concerted efforts by the government in introducing policies to encourage small and medium enterprises have brought the segment into the limelight. The National Knowledge Commission’s report published in 2007 indicates that 70 per cent of the innovations introduced by SMEs are “new to the industry”, while 56 per cent and 17 per cent are “new to India” and “new to the world”, respectively. Currently, 80 per cent of the 30 million SMEs in India are micro-enterprises. These employ over 75 million of the country’s population and contribute over 9-10 per cent to GDP. According to the Ministry of Micro, Small and Medium Enterprises, the number of MSMEs in India has grown at an annual average of 18.7 per cent over FY 2004-11. Investments in SME units have increased at an annual average rate of 6.3 per cent during FY 2007-12. In order to attract more investments toward MSMEs, angel investors and venture capital funds are being encouraged to increase funding. The Indian government has drawn up favourable taxation policies for investors funding SMEs. Moreover, Small Industries Development Bank of India (SIDBI) provides MSMEs with venture capital assistance by contributing to the corpus of various venture capital funds. The opportunity is quite large — just 5 per cent of start-ups in India receive financing aid from sources other than family and friends. The number of private equity and venture capital early-stage deals worth less than US$ 10 million has increased from 125 in 2011 to 244 deals in 2012 – an indication of a significant improvement in early stage funding facilities for SMEs and MSMEs.

Figure 10 Increase in the number of SMEs in India

Source: Ministry Of Micro, Small & Medium Enterprises, Aranca Research; Numbers for FY’07 onwards include wholesale/retail trade, legal, education & social services, hotels & restaurants, transport, storage & warehousing

0

50

100

150

200

250

300

0

10

20

30

40

50

FY'04 FY'05 FY'06 FY'07 FY'08P FY'09P FY'10P FY'11P FY'12P

MSME units (million) - LHS Fixed Investment (US$ billion) - RHS


……………………………………………………………………………………………………………………………………………........................... 3. ROAD AHEAD FOR PE & VC INVESTMENTS IN INDIA India offers investment opportunities in various sectors like IT & ITeS, pharmaceuticals, banking and media, among others. Additionally the number of exit deals has increased as opportunities in terms of exit modes have improved in the country. Whilst the outlook for PE and VC investments in India is bright, alternative investors looking at successfully investing in the country in the coming years will need to recognise some unique characteristics of the Indian market. 3.1 Identifying the right business opportunities across the country Private equity activity is expected to be strong in varied sectors. In the past two years, activity was highest in the technology sector, particularly e-commerce. In the medium-term, apart from technology, consumer-driven industries are likely to see increased momentum. At the same time, healthcare and real estate are expected to continue to hold the interest of general partners. As per E&Y’s Asia Pacific Private Equity 2013 survey, more than 75 per cent of the respondents cited the consumer sector as the most popular area for PE activity in India in 2013. Similarly, there is a lot of interest in India’s technology, media and telecommunications sectors.

Figure 11 PE investment by sectors (value) – 2012

Source: Grant Thornton, Aranca Research

28%

12%

10% 9%

5%

36%

IT & ITeS

Pharma, healthcare &biotech

Banking & financialservices

Real estate

Power & energy

Others

100% = US$ 7.4 billion


……………………………………………………………………………………………………………………………………………...........................

Figure 12 PE investment by sectors (volume) – 2012

Source: Grant Thornton, Aranca Research As India continues to grow, the country offers opportunities for investments across sectors and aims at creating a healthy enterprise and investment atmosphere. IT & ITeS: India’s educated workforce and cost advantage (provides up to 60-70 per cent cost saving vis-à-vis major source countries, which include US as well as countries in Europe) have helped it become a top destination for IT & ITeS companies. The country’s IT & ITeS sector is projected to grow at an annual rate of 10.5 per cent to US$ 225 billion in FY’20. The US has been a major importer of Indian IT services, with a share of over 60 per cent. During 2012, IT & ITeS witnessed about 140 deals with value of over US$ 2.1 billion. Major deals included Bain Capital’s investment of US$ 1.0 billion to acquire a 30 per cent stake in the BPO firm Genpact, Accel Partners & Tiger Global and Naspers & Tiger Global investing US$ 150 million each in Flipkart Online Services13. Pharmaceuticals: India’s pharmaceutical sector is expected to grow at an annual average of 20 per cent over FY 2012-16. The low cost of production and R&D facilities provide India an advantage, and in turn, enhance exports. Furthermore, the sector has seen an increase in the number of M&A activities in the country, especially by foreign players trying to capitalise on the cost efficiencies of Indian companies. During 2012, the pharmaceutical sector witnessed about 40 deals with an aggregate value of over US$ 888 million. The private equity arm of Mitsui Corporation invested about US$ 15 million to acquire a minority stake in pharmacy store chain Guardian Lifecare14. In addition, Tata Capital Health Fund recently acquired a minority interest of 13 per cent in Marck Biosciences Ltd for US$ 8.5 million15. 13Grant Thornton 14“Mitsui PE arm buys stake in pharmacy store chain”, December 24, 2012 Times of India 15“Tata Capital picks up 13% in Marck Bio”, January 31, 2013, Business Standard

35%

11% 10%

6% 4%

34%

IT & ITeS

Banking & financialservices

Pharma, healthcare &biotech

Real estate

Media, entertainment& publishing

Others100% = 400 deals


……………………………………………………………………………………………………………………………………………........................... Media & entertainment: The entertainment industry in India is expected to grow at an annual average of 15.1 per cent over 2012-16, supported by government policies such as hikes in FDI limits, digitalisation of cable and tariff relaxation. Growth would be led by the television and AVG segments. Furthermore, the sector is expected to witness higher FDI inflows and increased M&A activities. Real estate: India’s real estate sector is expected to expand at an annual growth rate of 19 per cent over 2010-14. Tier I metropolitan cities would account for about 40 per cent of this growth. According to McKinsey Global Institute’s India's Urban Awakening, India’s urban infrastructure requires a capital expenditure of around US$ 1.2 trillion over the next 20 years, of which around 34 per cent would be required for affordable housing. PE investment in the sector has been growing, as increased cost of debt and lower sales volumes (due to high prices), amid an economic slowdown, have left investors with little option but to turn to alternative sources of financing. During 2012, the real estate sector witnessed approximately 24 deals valued at about US$ 666 million. During the year, the largest PE investment came from Blackstone, which invested US$ 200 million for a 50 per cent stake in three business parks of Embassy Property Developments16. Aviation: India has seen a swift increase in passengers travelling by air following a rise in per capital income and growth in low-cost airlines. Domestic passenger traffic grew at an annual average of 15.7 per cent over FY 2006-12. Moreover, the government has relaxed FDI norms by allowing 49 per cent investment in aviation, with 100 per cent via the automatic route for greenfield projects. The government is targeting US$ 11.4 billion in airport infrastructure investment during the 12th Five-Year Plan (2012-17).

Table 2 Top 10 deals in 2012

Acquirer Target Sector % stake

Size (US$ million)

2012

Bain Capital Genpact Ltd from GA and Oak Hill

Technology 30% 1,000

Morgan Stanley Continuum Wind Energy Power NA 210

Blackstone Embassy Property Developments

Real estate 50% 200

Accel Partners and Tiger Global Flipkart Online Services Technology NA 150

Macquarie SBI Infrastructure Fund Ashoka Concessions Infrastructure NA 150

Naspers and Tiger Global Flipkart Online Services Technology NA 150

Citigroup Venture Capital International

Cox & Kings' Unit Prometheon Hospitality NA 138

Temasek Holdings Advisors India Pvt Ltd

Godrej Consumer Products

FMCG 5% 137

APG - pension fund Lemon Tree Hotels Hospitality 6% 130

General Atlantic LLC Fourcee Infrastructure

Equipments Logistics NA 125

Source: Grant Thornton, Aranca Research 16Grant Thornton


……………………………………………………………………………………………………………………………………………........................... 3.2 Exit opportunities Activity in terms of exits is expected to rise. Generally, alternative investors have an investment horizon of five to seven years. Investments made during the peak activity period of 2003-07 are still in fund portfolios. Estimates suggest that of the US$ 85 billion of private equity investments made in India since 2000, only US$ 30 billion has been returned. Therefore, the next two to three years are likely to see limited partners looking to unlock some of this value through exits. A reasonable number of exits with acceptable IRR would play a pivotal role in sustaining private equity capital interest in India.

Figure 13 PE & VC exits in India

Source: Bain, PwC, Aranca Research

Figure 14 Average deal size of PE & VC exits in India

Source: Bain, PwC, Aranca Research

0

20

40

60

80

100

120

140

0

2

4

6

8

2005 2006 2007 2008 2009 2010 2011 2012

Value (US$ billion) Volume (RHS)

0

50

100

150

2005 2006 2007 2008 2009 2010 2011 2012

Average deal size (US$ million)


……………………………………………………………………………………………………………………………………………...........................

Table 3 Top 10 exits in 2012

Firm exiting Target US$ million Route

General Atlantic and Oak Hill Capital Partners Genpact 1,100 Secondary

Carlyle Asia Partners II HDFC 841 Public market Goldman Sachs, Temasek, Macquarie, India Equity Partners, AIF Capital, KKR, Inv. Corp of Dubai

Bharti Infratel 763 Public market

(IPO)

Providence Equity Decision Resources 635 Strategic Deutsche Bank Lodha Group 519 Strategic

Kotak, Temasek Holdings ICICI Bank 299 Public market

Carlyle HDFC 276 Public market

Warburg Pincus Kotak Mahindra

Bank 290 Public market

Warburg Pincus Kotak Mahindra Bank

170 Public market

IREO & Merrill Lynch Panchshil Realty 142 Buyback Source: Grant Thornton, Aranca Research Strategic sales and public issues will remain popular in the medium term. Historically, IPOs have been the most popular exit routes. The volatility and depressed valuations of Indian markets in 2011 led to a decline in the number of exits to 88 during the year from 123 exits in 201017. An increase in strategic sales resulted in a revival in exit activity, with the total number of deals improving to 115 in 201218. 3.3 Differentiation of PE investment in India from the Western world The role of private equity investments in western developed countries is different as compared to emerging markets such as India. In developed countries, private equity firms are actively involved in leveraged buyouts, financial re-engineering and helping professionalise family-owned businesses. Since India is still in the growth phase, alternative financers largely play the role of providing growth capital for the expanding corporate sector. Another difference is the lower proportion of ‘turnaround’ deals and unpopularity of leveraged buyouts. Involvement in management and decision making In the Western world, PE investors have a say in the management of the company in order to build an effective turnaround. However, Indian promoters are very reluctant to sharing controlling stakes. PE investors, therefore, have to settle for a minority stake, leaving them with little control of the business. Unlike in the western world, partners of the PE fund rarely get involved with portfolio companies. Changing the management team is virtually unheard of. However, this trend is now shifting with a new 17India Private Equity 2012, Bain & Co 18India Private Equity 2013, Bain & Co


……………………………………………………………………………………………………………………………………………........................... breed of promoters that realises the advantages of a strategic vision and the professional approach, which PE investments bring to the firm. Promoters are now also looking to share an operating model with the PE investors rather than just viewing them as a source of capital. Exit options Exit opportunities in India are not as diverse as those in Western countries, especially when equity markets are not performing well. In the US, exits are mostly through strategic acquisitions and secondary buyouts, while IPOs account for a smaller per cent of total exits. However, in India, IPOs are considered as the primary exit route, followed by strategic sales and secondary buyouts. In the US, exits by way of strategic sales and secondary buyouts in 2011 accounted for about 94 per cent of total exits, while those via IPOs accounted for 6 per cent. On the other hand, in India, exits through strategic sales and secondary buyouts in 2011 constituted about 40 per cent of total exits and exits via IPOs comprised another 40 per cent. However, this has improved since 2009 when exits through strategic sales and secondary buyouts contributed to about 30 per cent of total exits, while those via IPOs comprised 60 per cent. 4. CONCLUSION India is an attractive market for the alternative investment community. India’s economy expanded at an annual rate of 7.7 per cent between 2003 and 2012 compared to the global economy’s growth of 4.3 per cent. Despite the slower growth in 2012, fundamentals for high single digit growth in the medium term remain intact. A key positive is that India’s economy is driven by domestic demand. A young population base, rising education levels and higher incomes are fuelling consumption demand. At the same time, infrastructure development coupled with a focus on reforms in key sectors such as manufacturing are expected to provide a boost to the economy’s momentum. Investors, therefore, continue to look at India in a positive light. Alternative investors, including private equity and venture capital funds, are playing an important role by providing growth capital to India’s large entrepreneurial pool. PE & VC investments in India have grown at an annual rate of 31.3 per cent between 2009 and 2012 in terms of value and an annual rate of 36.6 per cent in terms of volume. Additionally, increasing exit opportunities have helped PE exits increase at an annual rate of 47.9 per cent over 2009-12. India is now witnessing an increase in contribution from alternative exit routes such as strategic sales and secondary buyouts compared to the IPOs prior to 2009. Going forward, private equity and venture capital activity will continue to increase with interest rising in several sectors including fast moving consumer goods (FMCG), technology and healthcare.


……………………………………………………………………………………………………………………………………………........................... DISCLAIMER India Brand Equity Foundation (IBEF) engaged Aranca to prepare this report and the same has been prepared by Aranca in consultation with IBEF. All rights reserved. All copyright in this report and related works is solely and exclusively owned by IBEF. The same may not be reproduced, wholly or in part in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this report), modified or in any manner communicated to any third party except with the written approval of IBEF. This report is for information purposes only. While due care has been taken during the compilation of this report to ensure that the information is accurate to the best of Aranca and IBEF’s knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. Aranca and IBEF neither recommend nor endorse any specific products or services that may have been mentioned in this report and nor do they assume any liability or responsibility for the outcome of decisions taken as a result of any reliance placed on this report. Neither Aranca nor IBEF shall be liable for any direct or indirect damages that may arise due to any act or omission on the part of the user due to any reliance placed or guidance taken from any portion of this report.

Documents

rNOVEMBER 2013 · 2016. 2. 22. · According to The Global Venture Capital and Private Equity Country Attractiveness Index 2012 by IESE, India is ranked 32 among 116 countries and