India Private Equity Report 2013: Bain & Company Report
Global private equity investment showed no significant increase in 2012, continuing 2011's trend towards flat growth. North America was the strongest-performing market, while activity in Asia fell around 20% over 2011. India saw deal activity fall from $14.8 billion in 2011 to $10.2 billion in 2012. The number of deals, however, increased from 531 to 551 over this period, highlighting a fall in average deal size.
Not surprising, limited partners (LPs) are showing increasing caution this year when allocating funds. In fact, 2012 saw 55 funds with a mandate to invest in India, but the total fund value allocated to India was only $3.5 billion, down from $6.8 billion in 2011. All this has been driven by the fact that 2012 was an uncertain year in India both politically and economically. Reported lapses in governance, coupled with a lack of clarity in regulation, raised considerable concerns about India's attractiveness as an investment destination. Despite these challenges, the market is showing signs of maturity with all key stakeholders becoming more comfortable with the idea of private equity (PE) funding. The latter half of 2012 also saw the government become more proactive and bring forward some key pieces of legislation to create greater transparency in the regulatory environment.
India received only $3.5 billion of the $320 billion funding raised globally in 2012, according to UK research firm Preqin. General partners (GPs) also adopted a cautious approach, holding back to observe the performance of existing investments in a turbulent environment. In 2012, 80% of funding came from overseas investors, a theme that has been observed since the early days of private equity investment in India. There are no indicators that this trend will change soon, with traditional sources of PE capital in India, such as insurance companies and pension funds, inhibited by regulation from participating in this asset class.
Nonetheless, while 2013 undoubtedly holds several challenges for PE firms, raising capital is unlikely to be one of them. Our survey reveals that a majority of GPs rate "difficulty in raising capital" as seventh out of 11 challenges, far below concerns such as difficulty in exiting and mismatch in valuations. What is clear is that GPs will need to differentiate themselves to attract investors and prove they can deliver. They can do this by demonstrating a quality track record in investing and exiting.
The volume of deals grew only slightly, from 531 in 2011 to 551 in 2012. At 4%, this increase is very low, in line with the overall mood of caution in the market last year. This restraint, coupled with a decline in the total funds invested, saw deal size significantly impacted, with average deal size falling from $28 million in 2011 to $18.4 million in 2012. Early-stage growth and venture capital (VC) have played a critical role in deal making in 2012, with the number of early-stage deals under $10 million almost doubling to 244. Also, the top 25 deals made up only $4.3 billion, as opposed to $5.9 billion in 2011, and the average deal size at the top 25 dropped by almost a quarter to $175 million per deal last year.
Sectors that attracted the most investment last year were healthcare and IT/ITES. The majority of deals under $10 million were made in the e-commerce space, which was a sector highlighted in Bain's India Private Equity Report 2012. The subsector continues to grow in 2013, following on the nearly doubling of deals valued at less than $10 million in the e-commerce space, from 12% in 2011 to 23% in 2012 of the total deals.
Expectations about deal activity in 2013 remain cautious but still positive on the whole. Our interviews suggest that deal activity will see moderate growth in 2013 throughout the industry. The steps taken towards improving India's legislative framework have made investors a bit more upbeat, and GPs suggest that more deals will close in 2013.
PE investors we spoke to believe they add value to their portfolio companies in the form of vision and strategy, improving corporate governance and financial decision making. This marks a distinct change in their level of participation. Until recently, the support entrepreneurs sought was restricted primarily to customer access as well as domestic and international expansion plans. On the other hand, with growth and profit expansion hard to come by, PE investors are recognizing the value of operating teams. Factor in the lack of exits and these teams become extremely critical to overall portfolio management.
There was a significant increase in the number of exits in 2012 compared with 2011―115 exits last year versus 88 the preceding year. This accounted for a total value of $6.8 billion, up from $4.1 billion in 2011. The most popular exit route for both VC and PE investments in India continues to be through public market sales, including IPOs.
The financial services sector accounted for around 35% of all exits. High-profile exits occurred from ICICI, HDFC and Kotak through a partial off-loading of stakes acquired from 2003-2007, as these companies moved to cash in on the resurgent Indian stock market.
A vast majority of firms we spoke to believe that exits will increase in 2013 based on the expectations that capital markets will bounce back, which will increase investor appetite for private-equity-backed IPOs.
In focus: The healthcare opportunity
The healthcare sector emerged as a sector of growth in a contracting PE industry in 2012, and this is expected to continue to grow this year. Investments in healthcare almost tripled over the past year, rising from $0.46 billion in 2011 to around $1.3 billion in 2012. Deal volume also rose 50%, with 44 deals done in the sector in 2012.
The overall Indian healthcare market is around $65 billion and has grown 11% in the past five years. However, India remains a highly underpenetrated market in terms of healthcare spending per capita and offers huge growth potential. India's growing population, increased incidence of diseases, greater affordability, expanding insurance coverage and supportive government schemes are the key drivers of high double-digit growth expectations of the PE industry.
About 140 healthcare companies have received investment over the past five years, with 15% to 20% raising more than one round of capital. What this points to is the increasing confidence in the value creation potential of the sector. Even in terms of exits, the picture is promising. Of the $5 billion invested in healthcare, $2.8 billion has been returned, with an average holding period of five years for the top 25 deals.
For more information kindly visit,
Source: Bain & Company Report