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India pvt equity deals rise, but sizes shrink

business Updated: Jul 19, 2012 18:26 IST
Sachin Dave

As the economic crisis gripped India, private equity too have felt the tremors. With investors taking the cautious route, the number of PE deals increased in 2011 in value terms, but volumes shrank, a report by McKinsey has found.

According to the report Private Equity Asia-Pacific: Is the boom back?, India has shown strong growth in PE deals in 2011 but the average deal size has come down to $30 million from $50 million in 2010. Total PE deals worth $7.6 billion were concluded in 2011, just over half of its 2007 peak of $14.7 billion, the report said.

Analysts, however, said that the rise in the number of deals does not represent the true picture of India’s economic growth. "In India the numbers can be misleading as the reach and size of PE is nowhere close to its peers," said Avinash Gupta, head, financial advisory, Deloitte. "So one big deal in India can altogether change the total size of all deals and average deal size."

The report also said that large investments are much less common in India. “In interviews with investors, among the reasons cited were high valuation expectations among target companies, combined with the pressure for private equity firms to deliver higher returns in a volatile environment,” the report said. According to experts, while companies have not lowered their expectations for valuations, PE players are also not taking big bets.

“Initial public offering, the preferred exit route for PEs, is as good as dead,” said a senior official with an international PE fund. “So many PE players are stuck with the stake, unless they sell it to another PE player.”

However, domestic PE players are more active than global counterparts. “The share of total deal volume of local PE players jumped to 16% in 2011. More veterans from global funds stepped out and set up their local funds in 2010 and 2011,” the report said.

Since smaller PE funds are comfortable with smaller deals, with some valuing only around $25 million, they have an edge over larger peers. “Also smaller PE funds work on tiny fees, which is not possible for bigger funds," said the official.