The private equity industry, despite the challenges of 2012, is hoping that the new year will be more positive. According to new research from PwC, in 2012, there were clear signs that Indian promoters are willing to be pragmatic. This will potentially create opportunities for PE funds to look at businesses that have a good operating model, but have suffered due to the over-ambitious expansion, and/or poor capital structures.
"The global crisis meant that in some cases, global strategic investors may be looking to monetise their Indian assets (such as the Clariant deal late last year). The rumoured Lafarge deal, if it happens, could be another instance where emerging market growth needs support from local funding, as global players struggle in home territories. It is expected that there would be more such opportunities in 2013," Sanjeev Krishan, Leader, Private Equity, PwC India, said.
According to him, relaxation in the FDI regime, particularly in retail businesses, is expected to spur investments in the sector. From a PE perspective, sectors that support retail back-end will be of interest. In particular, sectors like logistics and warehousing, food processing and the services segment in general should be of interest to PE funds.
"Apart from investing activities, a number of PE firms will be focussed on raising their next round of funds, and this will be an indicator of how the global investment community looks at India. From an Indian fiscal standpoint, there has never been a greater need for foreign investment in the country. The role of PE investors in supporting Indian businesses is well-acknowledged. The question is whether the policy-makers have done enough to encourage them to look at India differently from the last year - we will have to wait and watch," added Krishan.
According to PwC research, aggregate PE investments declined 15 per cent, at $8.85 billion across 406 deals compared to $10.35 billion from 481 deals in 2011. Sector-wise, IT and healthcare contributed the most to PE deal activity in 2012. IT and ITeS accounted for over one-third of the total deal value and volume in 2012. Nearly $3.25 billion was invested in 162 deals in IT. This was aided by the $1 billion Genpact deal. In 2011, IT sector witnessed investments worth $1.85 billion across 158 deals. The healthcare sector showed the highest incremental growth with 48 deals worth $1.23 billion. Last year, the sector saw $418 million in investments across 38 deals.
"As PE funds focussed on consumer-centric investment during the year, healthcare proved to be a perfect defensive play for them. Despite a slump in the overall deal value, banking and financial services maintained their relative attraction to PE funds. However, energy, engineering and construction (E&C) and manufacturing witnessed the largest declines," Krishnan noted. While in energy and E&C, the total investments fell to one-third, from $1.7 billion to $478 million and from $1.09 billion to $366 million respectively, PE interest in manufacturing reduced to a fifth compared to 2011 (from $1.57 billion to $345 million). The infrastructure sector also suffered in terms of fresh investments due to the lack of a clear policy regime, further accentuated by policy inertia.
Another cause for the cautious approach was the fact that most of the funds are sitting on negative returns (2007 and 2008 investments). While some of them will typically have a longer holding period, at the moment, a number of infrastructure investees seem to be suffering from highly levered capital structures, caused by pricey assets and contracts bought over the years.