Column : The bright spot in high finance

In 2007, PE funds in India were equally excited to look at investment opportunities in the outward-looking sectors and companies sectors and companies which are dependent on developed markets for their business generation, like the IT and BPO. But from the beginning of 2008, many PE funds started to focus only on inward looking sectors and companies; sectors and companies which have their dependence on India's GDP, like education, media, telecom, engineering and manufacturing, power and energy, pharma and healthcare. PE funds justifiably feel that, in the on-going global recessionary times, lead by the developed markets, US in particular, India's economy is one of the lesser effected ones', hence the recovery time will be one of the fastest. And this trend towards the PE funds' focus on sectors and companies will get stronger for most of 2009, with the outlook gradually changing during the latter half of 2009.

2007 was the year when valuations reached their zenith, creating a market in India of over-priced assets. And the increasing trend of global recession in 2008 witnessed a gap being created in the valuation expectations between the seller and the potential buyers, resulting in the slowdown in the number of PE transactions, and their closures. The number of PE deals in 2008 was 399, valued at $10.79 billion, down by $3.2 billion or 22 percent compared to $14 billion invested in 439 deals in 2007, as per the data provided by the PE/VC research firm, Venture Intelligence. In 2009, the slowdown attributed to the valuation gap will continue for the first half, with new and pending deals going for closure, picking up from the second half onwards. And by that time, global economy showing signs of recovery will also contribute to a similar cause.

Fund raising for PE funds in India would continue to be a challenge due to the contraction of capital available. In 2007, 37 funds were able to close their fundraising; raising $9.68 billion, in contrast to 16 of the 84 funds who were on road, raising $4.56 billion. And in 2009, 78 funds are currently on road, and it is to be seen how many of them return home with their corpuses achieved. Moreover, there are 117 pan Asia funds, with India as their major focus area, currently on road to raise $59.2 billion in 2009, as per a London based research firm, Prequin. Many funds are sitting on what the industry calls dry powder or uncalled capital, i.e. cash lying in their bank, which will be available for investment in 2009. Globally, dry powder available to PE funds is more than $1 trillion, with buyout funds accounting for $472 billion worldwide (India specific data is not available).

A survey done by Coller Capital (a leading investor in PE secondaries worldwide), capturing 102 private equity investors in the world, found that two-thirds of PE investors will reach or breach their private equity allocations in 2009. The problems will not be appetite, but stretch allocations and liquidity needs which result in a shift towards quality General Partners (GPs) and portfolio re-balancing driving secondary sales. The survey also found that Limited Partners (LPs) think India will offer the most attractive investment opportunities for GPs in 2009 and beyond. India is followed by China and the developed economies of Japan and Australia. However, investors recognise a paradox in their collective hunger for Asia PE, including India, as over three quarters, the ready availability of capital is making it too easy for weak GPs to raise fund in the region.

Buyouts in India, traditionally, have been far and few. But in 2009 this trend would be seen reversing, as companies that have expanded very fast during the bull run until 2007 end will consider divesting their entire companies, and the promoters who are personally over-leveraged will be forced to sell their controlling stake. And PE funds will be happy taking controlling stakes and run the company during these uncertain, challenging business environments, and also will benefit from selling a similar large stake through a private share sale, merger or acquisition, or a public offer.

The author is an entrepreneur in the field of private equity. In the past he has been president and CEO of a few leading business process outsourcing companies