Global VC funds once again sharpen their focus on India
Financial Express | November 06, 2004
BANGALORE, India - There is a buzz once again in the venture capital (VC) industry over opportunities in India. VC funds from all over the globe are taking a fresh look at the country as it promises to give them good return, thanks to a booming domestic economy and a vibrant stock market. These include Japanese fund Jafco ($36 billion), Nokia Venture Partners ($650 million), Trident Capital ($1.9 billion) and Francisco Partners ($2.5 billion).
And, besides the big names of the industry, the medium and small players too are turning their attention to India. A 10-member team of Israeli venture capitalists led by Chemi Peres, president of Israel Venture Association was in India recently and met companies like Wipro, Infosys, Reliance and Tata.
The Indian VC fund approximated $360 million in new commitments in 2003. Even while the total number of deals decreased to 42 from 76 in 2002 the average deal size were much larger in 2003. Another trend that was seen was majority of the investments were in late stage and PIPE (private investments in public equities) transactions in 2003. And banks and media were seen as hot sectors.
While the entire Asia Pacific region attracted around $17.5 billion of private equity and venture capital in 2003 there is a clear trend towards emergence of successful India-centric venture capital and US-based VCs’ increased appetite to invest in India. Not surprising that big funds like Silverlake Partners with a assets over $6 billion, Coller Capital ($3.5 billion) and Pitango Ventures ($900 million) have shown increased interest in India.
Shift in focus
However, there seems to be a shift in the focus and direction of VCs investing in the Indian market. For instance there has been a move from early stage opportunities. A lot of recent vintage funds particularly private equity funds seem to be looking at growth and expansion stage opportunities. Does this suggest that VCs are moving to softer options of more lucrative sectors and later stage financing.
The Indian Private equity industry is attracting a lot of large overseas funds. "There is a shift towards growth and late stage financing but this is not on account of softer options but due to the types of funds that are being raised, the fund sizes, sectoral focus etc," says SN Rajesh, vice president, UTI Venture Funds Management Company.
Saurabh Srivastava, chairman, Infinity Technology Investments Pvt Ltd agrees with Mr Rajesh. 'The sectors that are attracting venture capital continue to be IT and BPO as before but sectors such as real estate are beginning to find favour with some specific funds like real estate funds in the offering. Entertainment again is becoming accepted as a high growth sector and venture capital investments are beginning to be made in the entire media arena. There is also a lot of interest in life sciences arena."
Some VC players like Gaurav Dalmia, director, First Capital are more forthcoming in accepting that there is a shift from early stage of financing. "It is true that investments at the seed stage have declined with most venture capitalists looking at growth capacity rather than early stage risk financing," says Mr Dalmia.
There is also a trend towards VC money being spent more broadly that specifically in knowledge-based industries like in the late 1990s. "Sectors like banking, pharma, infrastructure, engineering, even steel, are drawing funds from VC’s. Investors are looking for fast growth and stable margins and many sectors look promising along those criteria," adds Mr Dalmia.
Players also say that the theme this time, is mid-sized listed companies, doing private placements. "PIPE deals in the trade (private investment in public equities) are gaining popularity. These are late stage financings of companies with stable cash flow who need gowth capital," says Mr Dalmia.
Most agree that these are far less risky proposition than doing early stage financing, where a large demand-supply gap still exists. And according to Mr Dalmia the last round of PIPE deals, done over the past 2 years have given 30%+ IRR. However, Mr Gopal Jain, managing director, Gaja Capital Partners, says that it may be wrong to say that there is any kind of shift in the way VCs are looking at the market. "Shift will not be an accurate way to describe things. There is now fresh additional interest in these sectors. Overall a greater number of sectors have begun to attract investment interest," says Mr Jain. Most players agree that it is not just in India but there is a global trend away from early stage financing and lack of local innovation which is the main culprit.
India: A hot destination
Despite changing trends in India and different sectors being preferred by VCs India is a hot favourite of global VCs. "Yes India is an exciting destination for overseas VC firms particularly helped by the country’s proven advantage and track record in outsourcing and IT services. We see a lot of US VC firms encouraging their portfolio companies to out source or offshore their developement / product engineering functions from India," says Mr Rajesh. He also feels that there has been an across the board interest amongst US firms in looking at India. And new enquiries are being made on India. "These days, US VC firms in the Silicon valley are clearing asking about potential investee companies, entrepreneurs on India or China and off shoring strategy before committing investments," adds Mr Rajesh.
Agrees Mr Srivastava: "More than 80% of venture capital invested in India is from abroad, primarily from the US and Singapore. Over the last year, over 40 US VC firms have visited India and this shows the serious interest that is building up." Investments in India are either directly (Temasek , Warburg Pincus, General Atlantic Partners, etc.) or through India-centric venture capital funds.
India also became attractive for US VCs because of stagnant conditions in the US. "Since US markets ahve been flat and un-interesting for a while, and since investors with large sums of money are under pressure to get even 12% return, they are increasingly looking at emerging markets," says Mr Dalmia.
And since India offers size, familiarity, and some emperical record of private equity investors making money it is on everyone’s map. And there are other comfort factors. "An increasing number of VCs in US are comfortable investing in the IT and outsourcing sector which, by many, is seen as an adjunct to the US tech sector." says Mr Jain.
Future Prospects:
So in what direction is the Indian market headed as far as attracting VC is concerned. Mr Srivastava is very optimistic. "Overall the Indian venture capital scenario is maturing and with large US pension funds also entering the Indian market, I think that the industry is poised to grow," he says. He goes a step further by saying India is already amongst the top five destinations for venture capital in Asia and that this position will improve.
There are still others who believe there is more scope to invest even in the early stage financing. Says Mr Dalmia: "There is a demand supply gap in earlier stages and I think investors who are bold enough to do those will be well rewarded."
Mr Jain says that apart from the interest of the mainstream US tech VC firms in the Indian IT and outsourcing sector the Indian market is maturing. "An interesting development is the emergence of fund managers that combine deep investment expertise in the domestic Indian market with international private equity expertise," he says.
Driven by these opportunities Indian VCs are also making big plans. UTI Venture Funds is in the process of launching ’Ascent India Fund’ which would be a private equity fund with a size of around US $ 150 million. "We have witnessed strong response and already have commitments to the extent of US $ 40-45 million from a couple of Large Indian and International investors," says Mr Rajesh.
In 2003 while early/seed deals included Citicorp, Chrys Capital and Russel Infra Fund’s in Yes Bank, late stage deals included CDC Capital’s investment in ICI, ICICI Ventures in PVR Cinemas, Henderson Capital’s in Hindustan Times and Standard Chartered’s in NDTV.
Similarly, in PIPE it was Newbridge & Citicorp’s investment in Lupin Labs, ICICI Ventures deal in Tata Infomedia and CDC Capital & GIC’s in Punjab Tractors.
This clearly shows that there is a broad - not just in the sectors that are becoming more popular but also the stages that VC swould prefer. from Business Process Outsourcing to media to banking and phrama VCs have invaded them all. It now has to be seen which direction is the Indian market headed in coming months.
However, there are issues like the Indian VC market is yet to be established as a sustainable asset class among institutional investors. Besides lack of vibrant capital markets pose the challenges of exit route to investors. |
