Private Equity Investments in India Down 87%

Following up on the Indian Private Equity bubble, news came out this week that Private Equity investment in India dropped a staggering 87% in the first quarter of 2009 compared to the Q1 2008, and that equates to a 56% decline from the previous quarter (Q4 2008). PE firms invested approximately $526 million across 36 deals during the first three months of this year, as compared to $3.9 billion spread over 133 deals during the same period of last year. This is also significantly lower than the $1.2 billion spent across 63 deals in the last quarter of 2008.

It wasn’t just Buyouts and Growth Capital that was hard hit, Venture Capital (VC) activity saw a marked drop with VC firms investing $44 million over just 9 deals during Q1 (compare with $91 million across 18 deals in Q4 2008 and $226 million across 33 deals in Q1 2008).

Numbers should continue to be low as Private Equity investors take a cautious approach to the risk/reward opportunities in emerging markets.

The investment breakdown by sector was as follows:

IT & ITES—36%
Manufacturing—11%
BFSI—8%
Telecom—5%
Media & Entertainment—5%
Engg and Construction—6%
Healthcare and Life Sciences—6%
Shipping & Logistics—6%
Other—17%

The Indian Private Equity Bubble

Since we’re on the topic of Private Equity in emerging markets, here is an excellent interview with Rahul Bhasin, the Managing Partner of Baring Private Equity Partners (India). Much has been said of the increased committments that LPs have made, and are looking to make, towards the BRIC countries.  But is it all misdirected at this point? 

Some of my favorite excerpts from the article include Rahul’s views concerning the subject of the size of Private Equity in India:

The industry is five times too large.

We had $20 billion of investments in an $800 billion economy year before last (2007). That’s roughly 2.5% of our GDP (gross domestic product). The highest ever that the US reached was 1.4% of its GDP. Out of that 1.4%, more than 80% was taking public companies private, an opportunity that is not available in India. In China, the absolute investment numbers are similar, except that GDP is three-and-a-half times the size of ours.

The second issue is the explosion of private equity firms. There are 540 funds (active in India). I got this from one of my investors who tracked the number of people who tried to raise money from him, and includes private equity, venture capital and real estate funds. I don’t think it will be a significant exaggeration. Is the market deep enough for 50? I doubt it.

The rising tide raises all boats but when the tide is going out, and there is no ambiguity that it is going out, I think a lot of private equity firms who should not have existed in the first place will not exist. May be it’s five times too large and this means that 70-80% of the funds that exist today will not exist five years from now.

He made another excellent point when speaking about the U.S. buyout firms setting up shop in India:

I find it quite amazing (that they are setting up here). When I read articles about their intents, etc., my summary of what they seem to be saying is that “we have problems in our home markets, there is a crisis, there is an issue with our business model, therefore we will go to India”. I wouldn’t call it a positive vote on India. It’s more like saying “I don’t know what’s going on in my home base, let me go to some other market.”

I found that last bit to be the highlight of the article. Substitute any of the emerging economies’ names in for India and the point remains just as clear. In an attempt to avoid the nasty morning after of one bubble bursting, is the industry simply creating another in “newer” PE markets?

LPs Remain Attracted to Emerging Markets

According to a new survey by the Emerging Markets Private Equity Association and private equity secondaries firm Coller Capital, institutional investors are confident that emerging markets will continue to present attractive opportunities for the near future and many intend to maintain or expand their exposure over the coming years. Of those LPs that have already invested in emerging markets, over three quarters (78%) plan to commit to additional private equity managers and geographies over the next five years – nearly half of them (49%) plan on doing so within the next two years. 

That being said, for the here and now of 2009, LPs are not quite so bullish (one must also remember that in a severe downturn, the sentiment of today can easily last well into tomorrow!). 38% of investors said they would shrink their commitments to emerging markets private equity, 37% would maintain their current levels, while only 25% have any plans to increase them. Also, fundraising and investment activity in emerging markets in Q1 of this year dropped by about half to $8-$10 billion and $5-$8 billion, respectively. For the 370 emerging market private equity groups attempting to raise as much as $144 billion, there’s always next year!

An interesting point that came up in the survey that bodes well for emerging market GPs is that just under half of investors (47%) in EM PE plan to refuse to reinvest with at least one of their GPs over the next 12 months. This compares with 66% of LPs planning to refuse to reup with a GP in the PE market as a whole. 

The survey consisted of the responses from 156 financial institutions, including funds-of-funds, pension funds, endowments and family offices.

• EMPEA/Coller Capital Emerging Markets Private Equity Survey for 2009 – April 2009  

Private Equity Firms Invest $4.4 Billion in Latin America in 2008

In a new study by the Latin American Venture Capital Association (LAVCA) and The Wharton School, over 100 private equity and venture capital firms reported making 184 investments in Latin America in 2008, totaling over $4.4 billion. Five countries (Brazil, Mexico, Colombia, Peru and Chile), all of which have achieved or neared investment grade status in recent years, dominated the regional private equity landscape by being the home to almost 80% of the companies that received Private Equity investments in 2008. 

Fundraising in the region for the year totaled $6.4 billion, with 45 private equity and venture capital firms reporting new capital commitments. The majority of capital raised for Latin America went to regional funds (21%) and to fund managers based in the two largest markets; Brazil captured 48% of funds raised, and Mexico 15%. Peru and Colombia were also represented, with three new funds raised in each of those two markets and several managers aiming to close on commitments in the first half of 2008. 

Additionally, there were 54 reported exits by Private Equity firms in Latin America for 2008.

Emerging Market Private Equity Fundraising to Set Record in 2008

According to the Emerging Markets Private Equity Association, fundraising for private equity funds focusing on the developing world stands at $35.3B through the first half of 2008, a 68% increase over the same period last year and is on pace to break last year’s year-end record of $59B.

Funds focusing on Asia and Africa have seen the greatest increase, while fundraising for funds targeting Eastern Europe, the Middle East, as well as Latin America respectively have declined. Growth Capital focused funds account for nearly half the total amount of funds raised in the emerging markets this year, with venture capital funds comprising 26% to date and Buyout funds at 13% of the total.

Further, EMPEA’s analysis of industry trends for the first half of 2008 indicates that fundraising by private equity firms focused on the U.S. is down 3% in the first half of 2008 compared with a year ago at $133B, while Western European fundraising has risen 16% to $61B.