The Indian private equity industry has transformed itself in the last two decades. The first decade was mainly about venture capital investments, while the second decade has seen the focus switch to growth/expansion capital investments (to a certain extent replicating the public markets) with investments of more than $30 billion 1 in the past five years. As Indian private equity enters its third decade, following the global turmoil and credit crunch, it is beginning to transform itself into the “traditional” private equity model with a hands-on approach, active involvement with portfolio companies (strategic and operational) and providing value-added services to these companies.
The Congress-led alliance – the United Progressive Alliance (UPA) – recently swept the Indian election without the support of the Communist party. The outcome has given a thumbs-up to stability, predictability and moderation. The election outcome, announced on May 16, was the most convincing in the past two decades in terms of percentage share of the leading party and is the first time since the 1960s that any Prime Minister will return for a second consecutive term in office 2.
Prime Minister, Dr. Manmohan Singh, has promised to emphasise job creation, infrastructure and development sectors. A stimulus package is planned to put the economy back on a trajectory of sustaining 9 to 10 percent annual GDP. However, in the short term, the domestic demand-driven model will continue to keep real GDP growth over 6 percent even during these troubled times.
The re-elected UPA government faces the twin challenge of reviving economic growth and managing a high fiscal deficit. India Inc will look forward to important measures and reforms from the government to meet these challenges. Namely:
• Increased infrastructure spending: the government needs to accelerate infrastructure spending in areas such as power, roads, transportation, et cetera. (projection of $500 billion 3 of investments required between 2007 and 2012).
• Disinvestment of government stakes in public enterprises: to reduce the high fiscal deficit, the government is expected to sell off part of its shareholdings in public sector undertakings. This should also revive the initial public offering market, which has been dormant for the past 12 months.
• Relaxation of foreign direct investment (FDI) limits: FDI is expected in key sectors such as retail, insurance, banking etc, as these sectors require huge capital inflows to grow.
• Reform measures: the government is also expected to push through pension fund reforms, ease labour laws, streamline taxes, et cetera.
• Domestic growth: to augment rural growth, the government envisages the following additional policy measures:
• Expansion of the National Rural Employment Guarantee Act (NREGA).
• Focus on employment, education, health and rural infrastructure.
• 12 million housing units under the Indira Awas Yojana scheme.
• Affordable housing for urban slum dwellers under the Rajiv Awas Yojana scheme.
• Other measures :
• De-regulation of fuel prices in stages to ensure that users pay the same as global market prices. This will offset the burden on oil companies and reduce the oil subsidy.
• An auction of 3G and Wimax licences could provide substantial capital for infrastructure spend.
Post-election, the Indian equity market has rallied over 20 4 percent and surged around 80 percent 5 from its March 2009 lows. The market witnessed a strong inflow of around $4.3 6 billion in May. Compared to this, the Indian market had witnessed a mere $218 million net inflow in the first four months of 2009.
On a short-term basis, the recent public market recovery (mainly due to the positive election result) has revived exit opportunities for a number of private equity funds such as CVCI, ChrysCapital and ILFS. The total exit amount for private equity funds postelection is around $109 million (six deals) 9 compared with $202 million (10 deals) 10 from Jan 1 2009 until the election announcement date. Total private equity investment post-election is around $780 million (nine deals) 11 compared with around $1 billion (63 deals) between Jan 1 and the election result12.
The above statistics clearly indicate the revival of the private equity industry both in terms of investments as well as exits due to the positive impact of the election and the anticipation of a stable government and major policy reforms.
As private participation will be a key factor in infrastructure development, private equity funds are expected to participate in a big way in various infrastructure projects through the Public Private Partnership (PPP) model. Funds such as SBI Macquarie, IDFC and ILFS have already set up dedicated infrastructure funds.
The re-elected UPA government faces the twin challenge of reviving economic growth and managing a high fiscal deficit
The government's special focus on rural India and support for small and medium sized enterprises should create “inclusive” growth in India. As India is a capital-scarce economy, growth capital will, to a great extent, be provided by private equity funds. It is anticipated that many funds will invest in companies that stand to benefit from domestic consumption, with a special focus on the rural market. Other sectors that continue to attract private equity investment are education, retail, financial services, manufacturing, water management, waste treatment.
The government disinvestment/ privatisation programme (one of the key agendas of the election) may also see active participation from private equity funds.
Overall, a stable government with a focus on key macro reforms will have a positive impact on private equity industry growth in India as it will improve the investment climate and increase potential areas of investment for private equity funds. However, the key to these achievements is the timely execution of policies and reforms by the government while keeping the social agenda intact.