Draft
Private Equity in India 2009 Year in review
Foreword Signs of an early ‘off the block’ recovery; outlook cautiously optimistic
In this issue Foreword ....................................... 1 PE activity in 2009 ........................ 2 1.1. 1.2. 1.3.
Investments ......................... 2 Exits .................................. 10 Fund-raising ....................... 11
Key trends in 2009 ...................... 14 2.1. 2.2. 2.3. 2.4.
Rise in follow-on and co-investments ............ 14 Emerging sectors ............... 14 Due diligence and risk management ............... 17 Emergence of domestic LP class ............... 17
The LP-GP equation: aligning interests ......................... 18 Regulatory and tax update ........... 19 The way forward .......................... 20 Global PE landscape ..................... 21
After a quiet first three quarters, macroeconomic fundamentals began to recover in India toward the end of the year. The general view is that the worst is behind us, but caution remains due to fears of a ripple effect from a possible global “double dip” in the latter part of 2010. Aided by government stimulus and insulated by a lower dependency on exports (compared with other emerging markets), the Indian economy appears to be getting back on track with GDP for 2010 forecast to grow at 7.2% (up from 6.7% in 2009). On the flip side, however, inflation has reached an all-time high of 8.5%. This, coupled with a recovery in economic growth, may put pressure on the Government to roll back some of its stimulus measures. India’s recently released 2010 budget, was well received by most as a well-balanced middle of the path budget focused on long-term growth. It was designed to reduce the fiscal deficit in a calibrated way from 6.9% to 5.5% of GDP, while restoring duties on crude oil, gasoline and other refined petroleum products. While some worry that these taxes will be inflationary in the short term, others believe they are necessary to wean consumers off unsustainable government subsidies. However, when combined with a rebounding economy, a stronger rupee, and a well-timed exit from fiscal stimuli, the proposed measures could support India’s continued growth. Before the collapse of Lehman Brothers in September 2008, PE grew in India from USD2.5 billion in 2005 (across 151 deals) to a peak of USD17 billion (across 375 deals) in 2007. However, the global crisis took its toll toward the end of 2008 and 2009, as the crisis unfolded and global tremors impacted the Indian economy; 2009 has been the most challenging year for PE activity to date, with PE investment falling to a fifth of its historical peak. With liquidity scarce and PE houses taking a cautious approach, focus shifted from deal-making to preserving portfolio value as PE funds worked increasingly with management to improve operational performance and protect margins and cash. Encouragingly, however, there are two important emerging trends that should augur well for the future. First, there are signs that PE is rebounding with fourth quarter deal activity and “big bang” deals (underscoring investor confidence) making a comeback. Second, the Indian PE environment is evolving to focus not on just investing but also on successful exits. There were 44 non-IPO exits in 2009 (up from 25 in 2008) worth USD1.2 billion. Looking ahead, India should continue to see strong PE deal activity, with mainstay growth-stage minority interest deals continuing to dominate. Exits should pick up over the next few years, as firms look to realize profits on investments made between 2004 and 2006. Regulation is also likely to increase to meet global investor demand for more transparency, better risk management, and more sophisticated internal controls.