PwC Money Tree PE Deals Final

PE investments in India in Q2 ’12 decreases in terms of value and in volume

• Funds continue to look at IT, healthcare, consumer centric businesses.
• Raising fresh capital has been another challenge for India-focused PE funds.
• PE exits were worth US$108 million from 12 deals in Q2’12.

Private Equity (PE) firms invested US$ 1,616 million across 97 deals in Q2 of 2012, however, compared on Y-o-Y basis, the quarterly PE investments in India weakened 35% in terms of value, while deal volumes fell by 23% (US$ 2,477 million from 126 deals in Q2’11). The IT and ITeS sector emerged as the leader in both value and volume with 38 deals worth US$321 million in Q2’ 12.

These findings are part of the second PwC MoneyTree™ India report, a quarterly study of private equity investment activity based on data provided by Venture Intelligence.

According to Sanjeev Krishan, Chairperson, PwC in India. "This was not a surprise. As the global economic environment continued to remain unstable, the sentiment in the Indian market was also glum. Most investors spent considerable time fretting over the tax changes proposed in the Budget as well as the falling Indian rupee. This created further challenges for funds to exit their existing investments. Fresh fund raising has been challenging too."

But Sanjeev further added, "It is not as if PE funds have stopped looking at deals. On the contrary, funds continue to search for deals, particularly in the IT, healthcare and consumer-centric businesses".

At a time when the country has the highest need for capital, some of the trends found in the report include challenges in raising fresh capital for India-focused PE funds as well as an increase in 'structured' deals, as opposed to traditional growth capital investments by fund houses. PE investors exhibited in Q2’ 2012 their interest in Indian businesses and Indian affiliates of overseas corporations which are experiencing financial stress.

The valuation differences continue and, coupled with higher due diligence cycles and greater scrutiny by the investment committee amid slowing growth means that not many deals are getting consummated. Governance-related issues in PE investee companies have further caused the funds and their investment committees to be cautious.

The IT and ITeS sector has seen the highest level of PE funding and the maximum number of deals in Q2’2012. It grabbed the lead from the healthcare sector this reporting quarter with investments worth US$ 321 million from 38 deals, constituting nearly 40% of the total number of deals. This sector's average deal size increased to US$ 8 million from US$ 7 million in the previous quarter and for the same period last year.

"The Indian technology sector revolutionised the capital markets in India by setting new benchmarks for growth, profitability and governance. The sector has shown an ability to use disruptions to its advantage - the Internet revolution created the global service delivery model, the Y2K wave reduced the cost of new client acquisitions and set the stage for master services agreements and transformational multi-year IT deals and the quality revolution helped it maintain its edge. The sector retains its allure for PE investors”, said Hari Rajagopalachari, leader, Technology, PwC.

“The sector's response to the emergence of next-generation technology disruptions such as cloud computing, analytics, consumerisation of technology, social media, mobility and software product innovation and development will be watched with deep interest,” he added.

PE investments in the energy sector have dropped to US$ 290 million in Q2’12 from US$ 324 in Q2 '11. However, this corresponded with fall in number of deals to 5 in Q2’12 from 11 compared to same period of previous year.

The PE investment activity in the energy space, although improved over the previous quarter, remains a shadow of previous years. It also continues to be dominated by renewable energy. However, the policy scenario is changing in many states and the near-term future offers much larger and more diversified opportunities in conventional thermal power, mining services and in power retail supply and distribution

The healthcare sector stands third in terms of value, with a US$243 million investment, and second in number of deals, with 12 deals in Q2 ’12.

Investments in the education sector also recorded a near 100% growth from US$ 37 million in Q2 '11 to US$ 71 million in Q2 '12. The drivers for increased PE investment in this sector include a lack of public funding, households' willingness to pay for quality education and the government's stance on educational reforms. Investors have also preferred the unregulated space such as test preparation, vocational education and pre-schools. With the government encouraging skill and vocational education, this trend is expected to attract more investments.

Private equity exits

In Q2‘12, the PE exits were worth US$108 million from 12 deals. When compared to the same period last year, there has been a decline of about 89% in terms of value and 33% in terms of number of deals (US$ 954 million from 18 deals in Q2’11).

Almost 49% of the exits by value in this quarter have been through public market sale. On volume, the preferred modes of exit this quarter have been through strategic sale (five exits) and secondary sale (four exits).

The healthcare and life sciences sector tops the list for PE exits with a value of US$ 39 million from a single deal - constituting 36% of the total deal exit value. The manufacturing sector in terms of exit volume witnessed three exits, the highest across industries in this quarter.

The BFSI sector, which topped the list for PE exits in Q1’12 with an exit value of US$884 million from six deals, did not see a single exit in Q2’12.The sector had recorded two exits totaling US$156 in Q2’11.

In terms of region, Mumbai retained its first position this quarter by recording the highest level of funding with US$489 million (a 30% share of the total PE investments). Bangalore has the second highest share with 15% in value of deals and a majority share of 24% in number of deals. It received investments worth US$247 million from 23 deals.

Note to editors

• Information included in this release or related venture capital investment data should be cited in the following way: "PwC's MoneyTree™ India Report with data provided by Venture Intelligence." After the first reference, subsequent references may refer to PwC's MoneyTree India Report. Charts and tables displaying the data are sourced to "PricewaterhouseCoopers India Pvt. Ltd/Venture Intelligence data." After the first reference, subsequent references may refer to PwC MoneyTree India Report.
• For Q2 ‘12, buyout deals have recorded the highest value—US$625 million in six deals. The growth stage deals have declined by 60% and 15% when compared with the same quarter last year.
• The top 20 deals comprise 81% of total deal value in Q2 ‘12. There are three deals worth US$1oo million and above and eight deals with a value in the range of US$50 to 100 million. About 56% of the deals in this quarter are below the value of US$50 million.

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