INDIAAn Overview of Trends in Select Sectors and Markets July/August 2009 Country Snapshot* rivate equity activity in India has grown rapidly over the last five years, buoyed by a surging economy with annual growth rates averaging over 8.5% through 2009 Population: 1.2 billion the end of 2008. While India has not been immune to the recent global P Population Change (2008–2050): 53% economic slowdown, the country’s growing consumer-oriented middle class and lack % of Population Under 15 Years-old (2009): 32% of dependence on exports have helped India better weather the financial crisis than 2009 GDP: US$1.2 trillion many of its emerging market peers. Rivaling China as the destination of choice for 2009 GDP Growth: 5.4% private equity fundraising and investment in Emerging Asia, India witnessed US$7.7 2010 GDP Growth: 6.5% billion in funds raised and US$7.5 billion in capital deployed in 2008 as investors flocked to the country enticed by its growing status as an economic powerhouse, *All data projected. its strong entrepreneurial spirit and highly skilled, English-speaking workforce. The Source: International Monetary Fund, Population Reference Bureau. industry has suffered through the first half of 2009, with fundraising and investments decreasing by 32% and 57% respectively from the first half of 2008. Nonetheless, the number of India-focused funds operating within the country continued to rise in 2008 and 2009, and, in fact, a few funds were oversubscribed in the first half of the year. Although relatively shielded from greater financial distress because of its conserva- tive lending practices, India’s economy has cooled down over the past year. The liquidity and credit crises affecting Western economies have impacted India both in terms of lower foreign direct investment and reduced external demand. As of June 2009, India’s exports had dropped almost 28% from one year prior. In parallel with all of Asia, India’s stock markets were also hard hit. The Bombay Stock Exchange’s continued on page 2 India Private Equity Fundraising and Investment, 2005-H1 2009, (US$B) $9.9 10 Fundraising 8 $7.7 $7.5 Investment 6 $5.7 $4.6 US$ Billions 4 $2.7 $2.9 $2.5 $1.9 2 $1.4 0 2005 2006 2007 2008 H1 2009 Source: EMPEA. © 2009 Emerging Markets Private Equity Association 1 EMPEA Insight: India July/August 2009 benchmark Sensex Index lost over 50% of its value in 2008, discreet allocations to the country, they are largely active in after having enjoyed an average annual gain greater than India. This includes The Carlyle Group’s fourth Asian growth 40% for the prior three years. Although the public markets capital fund, Carlyle Asia Growth Partners IV, which closed at have rebounded in the first half of 2009, industrial output over US$1 billion in June 2009, with 80% anticipated to go has slowed and India continues to struggle with high inflation towards India and China. Additionally, Actis’ US$2.9 billion and currency depreciation, resulting in foreign capital exiting Emerging Markets Fund III, which closed at the end of 2008, the region. International investment has additionally been may commit up to US$1 billion to India. hindered by India’s difficult regulatory environment, rigid bu- Despite a challenging economic environment, several India- reaucracy and dilapidated infrastructure. dedicated funds achieved significant closes from mid-2008 Despite these challenges, many believe that India has per- through mid-2009. Global venture capital firm Sequoia Capi- formed relatively well through the economic downturn and tal raised US$725 million in August 2008 for its second In- is poised for a strong recovery. In fact, as the International dia growth fund. Similarly, India Value Fund Advisors (IVFA) Monetary Fund (IMF) recently revised upward its 2009 eco- closed on its fourth fund in June 2009 at US$725 million, nomic growth forecast for the nation from 4.5% to 5.4%, India almost double the size of its prior fund, and IDFC Private boasts one of the highest projected growth rates amongst Equity’s third fund closed at US$700 million. Jacob Ballas both developed and developing economies. By mid-2009, Capital India’s latest fund closed at US$440 million, while the capital markets saw a revival, with the Sensex having re- Avigo Capital Partners’ third fund saw a first close of US$150 gained approximately 66% of its value since the beginning of million, both in early 2009. Emerging players in India include the year. U.S.-based Mayfield Fund, which closed its first India-focused fund at US$111 million in December 2008, and local CX While private equity fundraising and investments both slowed Partners, which announced a first close in March 2009 of in 2009, investors remain confident of India’s long-term po- US$220 million. Despite the large increase in the number tential. The 2009 EMPEA/Coller Capital Emerging Markets of both foreign and homegrown private equity firms operat- Private Equity Survey revealed that India remains one of the ing within India, there have not yet been any signs of con- top three most attractive investment destinations for insti- tutional investors, with 22% planning to increase their expo- continued on page 3 sure to the country and an additional 8% intending to invest in India for the first time over the next two years. EMPEA Insight Fundraising Trends Editorial Director Jennifer Choi [email protected] Writing and Research Nadiya Satyamurthy satyamurthyn@empea. Private equity fundraising in India has witnessed a number net, Holly Freedman [email protected], Harrison Moskowitz of trends over the past year including the fact that sea- [email protected] soned managers have continued to be able to raise sizable Production Manager Cristiane Nascimento [email protected] funds; a greater percentage of Indian-focused funds have Advertising Opportunities been formed; there has been a growing rise in the number EMPEA Insight offers readers an overview of the data and drivers of sector-specific funds; and lastly, India’s corporations and behind investment trends in emerging markets private equity. financial institutions have begun to enter the private equity Each issue of EMPEA Insight provides an opportunity for a single exclusive back page advertisement. Issue-specific placements are market. Capital raised by India-focused funds grew by 67% on a first come, first served basis. For a list of upcoming issues in 2008 with US$7.7 billion raised versus US$4.6 billion in and more information about advertising opportunities and rates, 2007. In line with the rest of Emerging Asia, fundraising in contact Cristiane Nascimento at [email protected]. India dropped through the first half of 2009 to US$2.5 bil- About EMPEA lion versus US$3.7 billion raised during the first half of 2008. The Emerging Markets Private Equity Association is a broad-based However, India captures a large share of pan-Asian fund activ- membership organization founded in 2004 that focuses on the ity. Some of the largest fund raisings over the last year have emerging private equity markets of Africa, Asia, CEE, Russia/CIS, Latin America, and the Middle East. been Asia-dedicated and, regardless of whether they have 2 © 2009 Emerging Markets Private Equity Association July/August 2009 EMPEA Insight: India Limited Partners’ Planned Changes to Their EM PE Investment Strategy Over the Next 1–2 Years 100% No plans to invest 80% Stop investing s Decrease investingInvesting 60% Stay the same espondent 40% Begin investing % of R Expand investment 20% 0% Brazil China Russia / CIS India Source: 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey. solidation within the industry in the current economic down- frastructure funds seeking to capitalize on this investment turn, suggesting that India’s deal flow continues to be large opportunity have been able to raise significant pools of capi- enough to support these ventures. tal, including London-based 3i Group’s India Infrastructure Fund, which crossed the US$1 billion mark in April 2008, and Beginning in 2008, there was a marked shift in the charac- IDFC Project Equity’s India Infrastructure Fund, which has a ter of funds focused on Asian markets away from pan-Asian corpus of approximately US$927 million as of August 2009. funds towards funds with single country strategies. In 2008, UTI Asset Management Company (AMC), in partnership with there were 37 India-dedicated funds that achieved closes, HSH Nordbank of Germany and Kuwait’s Noor Financial In- a significant increase from 21 funds in 2007. Additionally, vestment Company, has announced its intention to set up while the majority of these funds are sector-agnostic, a grow- an infrastructure fund in India, targeting total commitments ing number are becoming increasingly specialized. Infra- of US$500 million. Additionally, the Macquarie SBI Infra- structure and technology are the leading industries attracting structure Fund, launched by the State Bank of India (SBI) in sector-specific private equity funds in India. Dedicated vehi- conjunction with Australia’s Macquarie Group and the Inter- cles targeting the agribusiness and clean technology sectors national Finance Corporation (IFC), has already raised over are also beginning to emerge. Some of India’s most recent US$1 billion. entrants are focusing on niche sectors such as healthcare and education. For instance, local start-up Kaizen Global is Indian corporations and financial institutions, viewing private currently raising its debut fund, which will specifically target equity as a critical part of their growth strategy, have also India’s education sector. begun crowding the landscape. This diverse group of new corporate entrants includes firms such as Tata Group, Aditya Some of India’s largest funds are those focused on the in- Birla Group, Mahindra & Mahindra (M&M) and Reliance In- frastructure sector.