Private equity interest in small- and medium or mid-cap companies is on the upswing in India and competition is heating up among established private equity players to pick up a stake in companies that show potential for future growth based on attractive valuations.
In the past few months, there were at least three major private equity deals, either through preferential allotment, or through other routes.
In the developed markets, private equity usually courts small and medium companies, but in India, the trend is relatively new because even larger companies were seeking out more capital to fan expansion plans.
Private equity players feel that the SME (small and medium enterprise) segment is heating up faster than the large, listed-entity space. This is primarily because the advantage in large-cap companies is limited due to stock market considerations as well as their large market capitalisation. "Large deals are not happening because the valuations are so high," said a Mumbai-based investment banker.
"We see opportunity for significant upside in the SME segment. There are companies that are showing 40 to 50 per cent growth annually, and we are facing a lot of competition from our peers," K Srinivas, Managing Partner, BTS Investment Advisors told Hindustan Times.
At least three major deals have been completed in the last one month. This was by equity majors, including Citigroup Venture Capital International (CVCI) and ICICI Ventures. Other deals are also in the pipeline. While Citigroup has picked up a 70 per cent stake for Rs 110 crore in a greenfield coal tar distillation project owned by the Himadri Group, ICICI Ventures has invested in Arch Pharmaceuticals.
Himadri Group's project located in West Bengal is worth Rs 150 crore. The company is into coal tar manufacture and plans to start operations in January 2008.
Arch Pharmalabs manufactures pharmaceutical intermediates and active pharmaceutical ingredients for pharmaceutical companies abroad. Amtek India, a Gurgaon-based auto components maker, is also considering preferential allotment to foreign institutional investors (FIIs).
The buzz is that US-based Ritche Capital, which has already invested in Kalpataru Power, is understood to be picking up a stake in the company. Blue River private equity fund is also known to be in the race to acquire a stake in International Print-o-Pac (IPP), a company engaged in printing and packaging material.