Private equity 2012: Has India lost its sheen?

The Indian Private Equity and Venture Capital Association (IVCA) held its conclave in New Delhi to celebrate 10 years of private equity and venture capital in India.

CNBC-TV18's Young Turks team was present at the occasion to get a sense of what PE and VC managers are thinking at this point in time. Questions like: which are the hot sectors? Has the India story lost its sheen and its magic? If entrepreneurial bets are being made of not? With over USD 50 billion invested in India over the last decade, the private equity and venture capital industry has made its presence felt across sectors. Marquee PE firms have put down significant capital and several have seen big ticket exits. Darius Pandole, Partner, New Silk Route Advisors, says the last decade has been one of spectacular growth for Indian private equity. "We have gone from being an industry that did maybe investments of a billion or less per annum to now consistently doing USD 10 billion or more per annum. We have gone from having a handful of funds to now having over 200-300 funds. The number of people in the industry has increased. The number of funding has increased and the number of deals being transacted has increased," he said.  
"What has also happened during this timeframe is that not only has the industry grown in size and scale but it has matured very nicely in as much as it has become nicely segmented. Today an entrepreneur can raise seed capital funding of $100,000 or $200,000. He can generate venture funding, growth funding or go all the way up to the big buyout funds where all the big global buyout houses are here to raise $100 million or more per transaction. So that in some sense is a very good illustration of how the industry has matured over the last decade," he told CNBC-TV18. If the decade gone by saw capital chasing business, the outlook for the short to medium-term looks increasingly challenging. Lack of decision-making, a governance deficit, a slowing economy and a ballooning fiscal deficit have savored the investment climate. Recent changes on the tax front proposed in the Finance Bill have only added to the growing uncertainty and discomfort of investors so has the India story lost its sheen? Anil Ahuja, Head of Asia of 3i, who has been kicking around the industry now for over two decades, thinks we have seen such cycles just about six-seven times so far. "There is always this sentiment, which goes up and then it overshoots on the upside, and then there is a sentiment that goes down and which shoots on the downside. Frankly, if you look at what’s happening today, a lot of it is being driven by policy and politics and governance etc. That was bound to have a knock on effect on the capital markets and on the investing environment," he believes.
"So yes, the private equity business actually belongs to the limited partners who provide the capital for this industry to run. They are the ultimate customer. The LPs are extremely concerned and extremely worried about what’s happening to India and the ability of the industry to make any money in this environment," he explained. Niten Malhan, MD, Warburg Pincus says, "We are long-term investors and therefore we tend to look through the euphorias and we tend to look through these periods when people will think everything is wrong because by definition that is how we look at investments. There are issues in India today. There are issues related to our macro economic factor as in terms of growth and interest rates. We think some of those are cyclical and will pass. There are issues around governance in terms of policymaking, in terms of regulations and taxation. Again our view is that these are issues that hopefully will get sorted." Industry hopes that government will not just give it a patient hearing but will amend controversial proposals like the recent tax on angel investment as proposed in the budget and SEBI's new AIF (Alternative Investment Funds) regulations which require all funds to register with the market regulator before investing. Punit Shah, Partner, KPMG says “SEBI should come out with some clarification. Hopefully, when the guidelines are actually notified this would be taken care because there is a transitionary issue where hopefully they should say that the existing funds are grandfathered in that sense. They should complete their fundraising and any new fund raising for the new fund or a new scheme should come under the new guidelines, which is AIF guidelines and therefore at that point of time, they may require a new vehicle to float the new fund or to do a new fundraising. But if this is not clarified then I think it will have unintended consequences where the existing funds will face a problem where they will have to stop fundraising midway and they will have to raise the balance fundraising in the new vehicle which is I think is going to cause lot of harassment.” With private equity investments having dipped in the last two quarters investors believe large deals may dry up and new investment themes like education and healthcare will emerge as favorites. Mahendra Swarup, President, IVCA feels large deals will continue to happen because there is an opportunity for large deals. “A lot more small deals will happen, which were not happening in the last five years. So, suddenly there is a growth of small deals and you will find that lots of more capital is going to go into small deals than large deals,” he told CNBC-TV18.