In my view, Healthcare, Retail and Infrastructure is where we will see tremendous PE action in 2013.
May 14, 2013
Overview of current conditions
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.
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.
Fund-raising
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.
Deal making
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.
Portfolio management
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
recognising the value of operating teams. Factor in the lack of exits
and these teams become extremely critical to overall portfolio
management.
Exits
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 45 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.
