Private Equity Investors Hope to Strike Cheaper Deals in India in 2012

Private equity firms looking to invest in Indian companies can hope to strike better bargains in 2012, as valuations are at a low owing to a weak stock market and the struggling rupee gives investors more for their dollar, say industry experts.

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India’s benchmark index, the Sensex fell 25 percent in 2011 and the rupee

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[INR=  Loading...      ()   ] fell close to 19 percent against the dollar. While this led to huge losses for many investors, going ahead it could provide an opportunity for those still looking for a slice of India’s growth.

Arun Natarajan, CEO of Venture Intelligence, a research firm that tracks private equity (PE) and M&A activity in India, told CNBC that one of the stumbling blocks for PE investments in India has been high expectations of promoters and entrepreneurs.

“Now, after a sustained decline in public markets we hear promoters are becoming more realistic with their valuation expectations and hence it is probably a good time for PE investors to strike good bargains,” he said.

Private equity investors struck 441 deals in India in 2011 at a value of $10 billion dollars, up 24 percent over the previous year, according to data from Venture Intelligence. The deals were struck across industries, excluding real estate.

According to industry experts deal volumes should go up 20 percent in 2012.

Vikram Utamsingh, Partner and Head Private Equity Advisory, KPMG India, says, “Valuations are somewhat muted and with continuing stock market volatility they should continue to be muted. Also if the rupee devaluation holds up then in dollar terms deals will be much cheaper than before.”

He adds that valuations of Indian companies have been falling since October 2010 and the drop could touch 20 percent this year.

Another reason why more investments could flow into Indian companies this year is due to the huge amount of “dry powder” or unused funds lying with PE firms. There is an estimated $5-20 billion of funds committed to India but not yet put to use. “There were too many funds chasing too few deals,” Utamsingh said.

Besides a lack of good buys, a weak IPO market also held PE investors back. PE investors typically look for an exit, often via an IPO, within 3 to five years of investing in a company.

But the IPO market in India has been subdued over the last one year, and was one of the deterrents to investing in Indian companies.

According to data from Venture Intelligence PE firms were able to find exit routes for their investments in only 74 companies in 2011 - including only four via IPOs - compared with 174 exits in 2010.

Private equity firms also look for M&As and public market sales to cash in on their investments.

Utamsingh feels “India has not yet returned capital to investors. They are still waiting for it.”

But Natarajan says that a lack of exits during 2011, especially when compared to an all-time high in 2010, is not an immediate deterrent to deploying capital. “Plus, investors also appreciate that India is among the very few economies worldwide that will show positive growth for the next several years.”