India's economic environment
improved last year,
recording GDP growth of
7.4 per cent in the fiscal
year ending March 31, 2010.
While the concerns over the fiscal
deficit and inflation remain,
both companies and consumers
are confident of future sustained
business and economic growth.
The Government of India has
reinforced this confidence, targeting
economic growth of 8.5
per cent in 2011.
Momentum from the last quarter
continued, with the April-
June 2010 quarter witnessing
PE deals worth $1.5 billion.
Although this is 30 per cent
lower compared with the prior
quarter, it is still 70 per cent
higher compared with the average
quarterly aggregate PE
deals in 2009, which amounted
to $884 million.
Large PE deals (those valued
above $50 million) maintained
the momentum they gained in
the last quarter with seven such
deals, but there was only one
major deal ($200 million and
above) compared with three in
the last quarter, E&Y noted.
Most large PE deals involved
global PE firms, reflecting their
continued interest in, and
attraction towards, India. Fundraising
saw a revival on the back
of resumed activity from domestic
PE houses, with more than 15
domestic PE houses either
announcing or raising funds
worth $3 billion.
The current quarter saw only
two PE-backed IPOs, possibly due
to the volatile equity markets.
These were some of the findings
by Ernst & Young, the global
leader in assurance, tax, transaction
and advisory services, in its
fourth edition of Private Equity
Roundup, a quarterly newsletter
on trends and perspectives related
to PE activity in India.
"Looking ahead, we are cautiously
confident, since the global
economic environment
remains a concern. While uncertainty
prevails in Europe with
the sovereign debt crises and
slow economic growth among
several developed economies,
PE activity in India in 2010 is
expected to be higher than in
2009. However, it remains to be
seen if we will return to pre-
Lehman 2008 levels," Ernst &
Young observed.
In the second quarter of 2010
(2Q10), India saw 57 PE deals,
cumulatively valued at $1.5 billion.
This was the second-highest
quarterly performance in the
last seven quarters. Both 1Q10
and 2Q10 recorded deals worth
more than $1 billion after a subdued
2009, during which no
quarter crossed the $1 billion
mark. In addition, the aggregate
deal value for the first six
months of 2010 is now almost
equivalent to that of the whole
of 2009.
For the last three years, infrastructure
has continued to
attract significant PE investments,
accounting for 28 per
cent of total PE deal value in
2Q10. The PE deal value in
financial services has remained
consistent and cement and
building products witnessed a
single, but significant PE deal.
Healthcare and retail and consumer
products have also seen
considerable deal activity during
this quarter.
In terms of deal volume, technology
has maintained its
growth trend and has garnered a
large number of PE deals in
2Q10. The education and
healthcare sectors have
improved significantly by deal
volume, with five and four deals,
respectively, in the same quarter,
Ernst & Young stated.
In 2Q10, infrastructure saw
four PE deals, collectively worth
$412 million. GMR Energy, a
company engaged in power
generation, transmission and
distribution, saw investments of
$300 million from two deals-Singapore
government-owned
Temasek Holdings made an
investment of $200 million,
while a consortium of investors
led by IDFC Private Equity
including Argonaut Ventures
and Ascent Capital invested an
additional $100 million.
Seemingly, the power sector
remains a favourite with PE. In
the first half of 2010, the sector
witnessed seven PE deals worth
$779 million.
Another notable PE deal was
Actis LLP's $78 million investment
in TRIL Roads, a joint venture
between Actis and Tata
Realty and Infrastructure Ltd for
road and highway projects in
India. The JV ownership ratio is
65:35, with Tata Realty holding
the majority stake.
According to Ernst & Young
and FICCI's India Infrastructure
Summit '10, the Government of
India has encouraged private
sector participation to develop road projects and has also
announced numerous policy
changes. These include 100 per
cent FDI for the roads sector and
model concession agreements.
In addition, funds allocated to
road transport in the budgetary
estimates (BE) of 2010-11
amounts to approximately $4.3
billion, compared with $3.7 billion
allocated in BE 2009-2010,
reflecting an increase of more
than 13 per cent. Thus, substantial
investment is required in the
sector, and PE firms may find
interesting investment opportunities
in funding road and highway
projects in the country.
Outlook
There are signs that the increase
in PE activity in India over the
last two quarters will continue
its upward trends, Ernst & Young
said. On the supply side, robust
GDP growth forecast and
increasing confidence should
lead to higher investments and
higher deal activity. On the
demand side, a number of funds,
including the global PE houses,
are sitting on significant
amounts of "dry powder" and are
increasingly looking at investment
opportunities in emerging
markets, particularly India and
China. However, although these
domestic factors should support
greater deal activity, Eurozone
related issues are still a concern
in the global economy.
"The core infrastructure sectors-
power, roads and highways,
and construction-are likely to
see continued PE deal activity.
Furthermore, PE houses are also
likely to pursue investment
opportunities in the domestic
demand-driven sectors including
education, healthcare, and
retail and consumer products,"
Ernst & Young added.