Simple Fundamentals

Private Equity transactions in India have seen sudden splash in last few years. Many VCG / PEG see India as a hot destination. In 2005, a report from Goldman Sachs even put into the BRIC (Brazil, Russia, India, China) class of emerging economies.
The year 2007 had seen a lot of PE money pouring into Indian market. In the same year VC / PEG investments crossed the USD 17 billion mark. This huge amount of money chased few asset classes and raised the prices of few favored assets. Indian corporate (private & public) got the substantial chunk of this money. With lot of money chasing fewer avenues, valuation reached skies in no time. Riding on positive business environment PE and M&A transactions gained popularity and buyers paid good valuations for buyouts.

Then came the 2008 with all the negative cues and the business outlook changed all of the sudden. With subprime dragging US economy down, all the dollar based economies took a blow. The beginning of 2008 made analyst to revise their PE transactions estimates to lower end of the table. Many thought and even think that in amidst of global slowdown, the deal making process will get effected.

In reality we might see more number deals happening in the near future in terms of M&A or private placement. The reasons are many.

 IPO market has been hit due to the steep fall in secondary market. Investors now prefer to play wait and watch game with every IPO or FPO. If we look at past few months in 2008, many power packed IPOs got a hit. IPOs like Reliance power failed to fetch good returns to the investors. Also, the year has witnessed the golden era of charging high premium being dried-up and many companies have deferred their plans for going public. The looking for expansion are relying on PEG to fund their project plans. With domestic demand on the rise and expansion plans on the up PEG are finding lot of takers.

 The year 2007 saw valuations to touch unsaid limits. The fall in stock market has put the market price of companies to some reasonable levels. This would encourage the PEG to pick stakes in firms which were expensive sometime back. Recently, many PE firms have picked substantial stakes from secondary market in PIPE transactions to benefit from the falling prices.

 In the era of rising interest rates, corporate find it difficult to finance their projects through banks & FIs. In these cases, they approach PEG to get their plans going. PE firms on the other hand get decent deals as the target does not have many options. Also, the investors get a chance to provide hybrid financing to these businesses.

 With valuations on the more realistic fronts, the time is good for the corporate to evaluate their growth strategies. The buyers looking to diversify or get firm footing in the same market can hunt for potential targets at reasonable price. For sellers, it’s the time to identify non-core assets and focus on the real business. The time is right to align business strategies.

 Some family owned businesses have also realized the importance of going professional in today’s context. They see a need to bring in management and directors who can run the corporate on professional lines. In some cases, legacy issues might also induce the business families to look out for financial partner. PEG groups also find these deals quite lucrative as the business after restructuring unlocks a lot of value

Indian economy despite recent slowdown is in the emerging stage, where a lot of deals are bound to happen. With new sectors now being opened for foreign money, lot of Indian companies can be seen as potential targets. Also, corporate / financial buyers which are thriving to achieve abnormal growth and size with Indian growth story will be zooming their radars for potential targets.