Money men coming with a $ 4b dream

The Times of India, Bangalore | Monday, 2nd Jan 2006

Bangalore: If 2005 was any indication of things to come, just close your eyes and be ready for a surprise. The year 2006 is going to be the blast of a year of funds. The fund flow promises to be in the vicinity of $ 4 billion in 2006 alone, 50% of the cumulative flow of private equity and venture capital that has come into India till date. Close your eyes again and dream!

The India story is the panache. For those who are fed on such facts, as, ?in the IT sector, venture funds do not bat an eyelid if you do not have a India delivery center,? the events of 2005 should prove beyond doubt that this maxim has been extrapolated into the finance world.

Till now you had funds flow in the form of short term money for portfolio money in the Indian market. Now serious and long term investors are looking at India. Almost every private equity fund is raising money in their home countries for investing in India? says K E C Raja Kumar, CEO, UTI Venture Funds Management.

The numbers say it all. The Private Equity (PE)/Venture Capital (VC) investment in India is tapped to cross $2 billion by December 31,2005, according to TSJ Media, a venture fund watcher. As of November 30, the scoreboard read $ 1.86 billion, says TSJ?s Arun Natarajan.

The pace of investment picked up speed in the second quarter (ending September) with over half a billion dollar being pumped in. This quarter also saw some big exits for PEs demonstrating the potential the Indian market offers. Essar Groups $ 1.56 billion acquisition of BPL communications, Oracle Corps $ 593 million buyout of Citigroup Venture Capital?s stake in the i-flex and HT Media ?s $ 86 million PE-backed IPO sent expectations soaring. As they say the proof of the pudding is in the eating.

The natural question that comes up next is: where are these mega bucks going? A look at the deals in 2005 should give us vital clues. IT & ITES sector took 23%, manufacturing 17%, healthcare 13% and BFSI 11% from the funds that flowed in. If you draw a pie ?chart it turns out be a neat little fan, funds spread out almost equitably. For a country, which saw its emergence on the global scale because of software exports, this is a remarkable market development story.

Yet 2006 will have its keystone sectors, which will play the pied piper- like telecome and software in 2005. UTI?s Raja Kumar bets on mergers and acquisitions as the top activity, which will drive the money into India in 2006. And this is across the board. As Indian companies have acquired the hunger for growth, the belief is that the capacity expansion in organic growth would be largely founded by private equity/venture capital. Agrees Natarajan but adds real estate and buyout deals, ? both of which have started to witness action?.

ICF Venture managing director Vijay Angadi in fact throws light on one area where buyout deals may get the fire. ? The interesting trend is going to be even small sized companies with high quality overseas entrepreneurs can access the large pool of mid and late stage VC fund pool in India and go and acquire small and mid sized US companies using local (i.e Indian) VC Money. Then the pooled or merged entity can ship costs and management overheads to India. If the combined entity is even as small as $ 20 million to 30 million it can go public in India fairly easily. The Indian markets are very receptive to quality IPO?s and a $ 20 million company is a decent base unlike in the US where the barriers for an IPO at higher?.

The VC industry agrees that there is definite increase in the number of high quality and serial Indian entrepreneurs in the US who would previously have obtained funding and the rest of the support system there ( in the US), now looking at India beyond the traditional back office lens.

So not only are our (Indian) barriers to an IPO lower, but the post IPO valuation currency is also high. This currency can be used for further acquisitions. Smart entrepreneurs are looking at these options seriously. In 2006 this trend, i.e acquisition of small companies or divisions in the US could take off,? says Angadi.
 

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