It looks like the long tail of Indian private equity is the one wagging the dog. The smaller size funds are keeping the risk capital pipeline flowing while the big guys are flagging.
For a while now we have heard how the bad economic situation in India, has been messing up private equity deal flows. Hindu Business Line reported the slowdown a few days ago. Some of the bad news is also reflected in the fact that some large funds focused on the Indian core sector like 3i Capital, are cutting down on its India top management. Apax has seen a senior management change.
There is nothing new in all this, one might be tempted to say. Since the economy is bad and promoter expectation of getting a good valuation still high, there are no deals. All this is only partly true because the short end of the risk capital pool in India, the venture capital guys are as busy as ever. They don’t have the same problems that larger guys like TPG, TA Associates, Blackstone, or Warburg Pincus do.
To validate this I sought some help from Arun Natarajan of Venture Intelligence, who has one of the best databases for this industry in India. My query to him was simple. Can we look at fund size (given by the total capital the fund is managing) and the number of deals done in 2011 and 2012? Just a basic correlation between size and activity levels. To understand the data better I did a simple scatter plot. Take a look at the graph below
Data source: Venture Intelligence
Most of the activity has been done by funds that have less than Rs 1,000 crore under management. Funds like Blume Ventures, Accel India, Matrix Partners, Nexus, Kalaari, Ventureast and IDG have been superbusy. So has been SeedFund, which has less than Rs 100 crore under management.
In contrast most of the larger funds like ILFS, Baring India, IDFC, or ICICI Venture have found it tough going. The one notable exception has been Sequoia which has done 56 deals even though it has close to Rs 1400 crore under management. I have always believed that Sequoia is a Venture Capital firm trapped in a Private Equity body. This was true of Chryscapital too when Ashish Dhawan was around. Since he has moved out Chryscapital seems more, how shall one put it, a lot more pensive and tentative in its approach!
A large part of this slowdown of opportunities for large funds can be attributed to the fact that power, roads, ports, bridges — all these sectors have been hit by the lack of policy clarity. They have also been hampered because good quality buy-out assets aren’t available.
In contrast smaller funds are travelling the length and breadth of the country to places like Coimbatore, Indore, Udaipur, Nagpur, Bhubaneshwar looking for the Rs 150-200 crore revenue companies. A lot of these firms are hungry for capital and have a some room to grow before they hit the policy glass ceiling!
Recently a private equity fund manager, who is trying to raise a fund right now, complained: “If I want to raise a large Rs 1,000 crore fund, the Middle East and Canadian money is available. But nobody wants to give just enough to raise a Rs 300 crore fund!”
So perhaps it is time for global investors in Indian private equity assets to let a thousand small funds bloom. They might make some quality returns and will also pay lesser asset management fee!