By Reshma Krishnan.
You can’t open the paper today without hearing the word fund, start up, or Private Equity. In fact the top news in the Economic Times yesterday was the buyout fund, Blackstone being the frontrunner in the race to own Mphasis, currently owned by Hewlett Packard. The current atmosphere has come a long way from the dark days (2008-2013) which saw massive structural shifts on the back of the global financial crisis which led to poor performance, an inability to raise follow on funds and an inactivity on part of global funds who were smarting from making bad deals, or rather deals at ludicrous 2006 valuations. In fact, by the end of 2012, almost 80 percent of deals made around 2006-2007 were valued at less than half at what they were done. This combined with the vast IPO wasteland meant exits were hard to come by.
So 2015 was a bonanza year for the Indian PE industry in comparison. The first 6 months of 2015 saw a record a five-year high of exits worth ~$5.2 billion as compared to ~$4.2 billion for all of 2014. Indian PE industry saw $22.4 billion in investments last year, 31.8% more than the previous highest of $17 billion in 2007, according to a report by Bain & Co. India Pvt. Ltd. The 2015 deal value marked a 47% increase over the $15.2 billion India received in 2014. Compared to the $12.5 billion invested in 2014, the inflow in 2015 is up nearly 67% backed by a structural shift from pure play growth capital to taking exposure in companies with new business models. 2015 saw the emergence of small fund of funds like One Crowd, where limited partners are groups of new age investors who pool funds to take advantage of a booming entrepreneurial zeitgeist. There was a generational shift as well; while the old world investors met in boardrooms, these investors catch up at café’s and lounges and try to cut out most of the red tape. Granted investments are also a fraction of the amount but for a while there, in 2015, it was as if anyone with an app and a cool logo could raise money. 2015 also saw many misses- failed investments on the back of bad due diligence and a herd mentality built on the premise that deep pockets could tide over faulty business models (Foodpanda) model or strained investor relationships (Housing.com).
And of course, the big boys came back. Big-ticket deals ($100 million and above) constituted about 63% of total private equity capital invested in 2015. There were 53 big-ticket deals with a total value of $13.2 billion, compared to just 24 deals with a total value of $5.8 billion in 2014, up nearly 127%. Top deals included $700 million in Flipkart, India’s biggest e-commerce company, by Tiger Global Management and Steadview Capital Management, and a $635 million investment by Alibaba and SAIF Partners in Paytm; a $500-million investment in Snapdeal led by Softbank Group, Apax Partners’ $386 million investment in Shriram City Union Finance, Blackstone’s $384-million acquisition of business process outsourcing firm Serco India and a $316-million investment in the consumer division of Crompton Greaves by Temasek Holdings Pte Ltd and Advent International. According to the Bain report, exit values have risen 57% to $9.4 billion.
But it’s not all sunshine and roses. Flipkart received a rude shock when Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, marked the company down by 27% implying a valuation of $11 billion from $15 billion it was valued at when it received the $700 million investment last year. 2016 will be no doubt an awakening for many e-commerce transactions. It’s only a matter of time before we find out if any of those castles built in blue skies can weather a stormy monsoon.
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