india going global.indd - The IIPM Think Tank

RESEARCH
system of corporate governance, fi nancial reporting
etc will dramatically reach global standards.
Even industry experts say the full potential of private
equity investment in India has not been unleashed yet.
There are certain hurdles, which are coming in the way
of private equity investment in India. The most important
one is the FDI cap prevailing in certain sectors
such as telecom, aviation, banking, insurance, NBFCs
etc which is limiting their scope of investment in India.
Even if they make any investment in these sectors their
exit becomes difficult due to these sectoral caps.
The new guidelines issued by the government on
overseas issue of preferential shares, though rightly intended
to restrict the flow of money into the Indian real
estate sector, have hit the overall private equity industry
itself. The new guidelines have also put certain restrictions
on the deal structuring capability of private equity
players intending to invest across the sectors, admits a
domestic private equity player who did not wish to be
named. Another major issue confronting private equity
investors is limited number of good companies available
for investment because of lack of proper fi nancial
information and other materials. This has resulted in
large funds chasing few of them making it difficult to
gain entry. This in turn is pushing up their valuations
higher which often tend to affect their future returns.
Then there are many mid-sized enterprises, which are
largely family controlled and where the entrepreneurs
are not willing to dilute control over the management.
But most PE fi rms want a say in the management and
functioning of the company.
In spite of these challenges, the Indian PE market
is booming and the industry is bullish on its growth
prospects. Certain sectors which are looking good
are pharma/biotech, real estate/construction, infrastructure,
manufacturing, retail, IT and IT-related
services.
Recently, General Atlantic, Goldman Sachs and Saif
Partners picked up stake of 5% each in the National
Stock Exchange. Another private equity fund Chrys
Capital has invested $24 mn in Mankind Pharma. In
2006, the Carlyle group invested $20 mn in Claris Life
sciences. Industry sources say private equity fi rms are
active in Indian real estate and infrastructure sectors.
They invest in Special Purpose Vehicles (SPVs) set up
by these companies and pick up stake in established
real estate companies. In 2006, private equity investment
rose by over 230% to $7.46 billion compared to
$2.26 bn invested in 2005. The first quarter of 2007
has already witnessed an investment of $2.5 billion
from private equity fi rms up from $1.27 billion during
the same period, according to data released by Venture
Intelligence.
Overall, there is a broader consensus among private
equity players that India is a suitable destination offering
great opportunities for the growth of private
equity investment. It is only a matter of time, say experts,
when the huge potential in this industry will
be realized.
Forecast M&A Activity by World Region:
The analysis shows that, in the fi rst five months of
2007, there was a significant discrepancy between the
key trend indicators of deal values and volumes. The
last time the market witnessed this kind of disconnect
where the average deal size rose, but the number of
deals fell - occurred at the height of the dot com boom
in 2000. A sign that the market is starting to cool came
in H2 2006 when the total number of deals fell for the
fi rst time since H1 2003 (dropping 8 percent compared
to H1 2006).
The analysis shows that the appetite for M&A transactions
appears to be slowing, despite conservative
balance sheets. Twelve month forward PE valuations
The analysis says that Europe
continues to exhibit the
strongest M&A picture out of
all the major global regions
rose marginally to 17.1x compared to 16.8x in both
June and December 2006 which implies a restriction on
the available bid premium in the marketplace. Balance
sheet capacity remains conservative but has tightened
marginally from 0.85 times to 0.91 times.
Of the major global regions, Europe remains the
most positive in terms of potential M&A activity, due
to rising PE momentum, while AsPac once again looks
the weakest. The U.S. remains static in terms of valuation,
suggesting the potential for a slow down.
In terms of sector regions, the best M&A prospects
appear to reside in Utilities Europe, Basic Materials
North America, Oil and Gas North America, Industrials
Europe and Consumer Services Europe with the
weakest prospects being Consumer Services AsPac and
Consumer Goods AsPac.
Europe:
The analysis shows that Europe continues to exhibit
the strongest M&A picture out of all the major global
regions. Twelve month forward PEs stood at 16.2x
at the end of the first five months of 2007, some 7.3
76 Need the Dough July-October - 2007