Private Equity Investors Favor India Over China

A report by Four-S Services shows India receiving about $19.5 billion worth of private equity investment in 2007, vs. $12.8 billion for Chinaa flip-flop from 2006

More PE funds flocked to India compared to China in 2007. For the first time, China PE investments were in the range of $12.8bn; nearly 34% less than the investments in India at $19.5bn. This was a huge change from 2006, when China received $12.9bn worth of PE investments, nearly 70% more than the $7.6bn received by India.

However, there was a qualitative difference in the way funds were deployed in China compared to India. China's traditional Manufacturing & Infrastructure sectors attracted $8.3bn, constituting 65% of total funds invested; compared to $6.2bn constituting 32% of the total for India in 2007, according to a Four-S Services report .

Interestingly, the core sectors were the main areas of PE interest. Infrastructure (Engineering & Construction) sector accounted for a lion's share of the deals in 2007 with nearly $4.0bn worth of investments (20.5% of total PE/VC investments announced during the Year).

As core development continues to be a high priority, Infrastructure is expected to be one of the fastest growing sectors in India, requiring huge investments worth $492bn over the next 5 years. The major growth driver within the Infrastructure sector was the Construction industry, accounting for 60.3% of the investments.

The top four sectors of Infrastructure, Telecom, BFSI and Real Estate (in that order) received nearly 72.3% of all PE investments during 2007.

Indian PE performance rocked last year mainly due to the fact that there are more private enterprises in India than in China that are attractive to PEs. Though India has always had a higher percentage of private sector companies compared to China, it is only in recent years that there has been a spreading of awareness among the investing community of the strong education system, English language proficiency, legal & financial structures and democratic governance in the country, says the report titled Indian Private Equity Report 2007.

This awareness, combined with sustained growth, has led to increasing investments in India. Also, the year saw some mega IPOs in China, drawing large investments from FIIs & PEs, leading them to limit their private deals and thus maintain their China exposure at certain levels.

Year 2007 saw Private Equity (PE) and Venture Capital (VC) investments 'Riding a Wave of Euphoria' in India. If 2006 was about PE/VC activity 'Bursting into Bloom', by 2007, the sentiment had risen to ecstatic levels as can be witnessed in the phenomenal growth of PE/VC investments in India, which hit an unprecedented $19.5bn in 2007, 2.5 times the $7.6bn figure of 2006, the report adds.

Total PE/VC investments announced in Indian companies was $19.5bn across 394 deals in 2007, compared to $7.6bn across 298 deals in 2006. The average deal size nearly doubled compared to 2006 ($41.7mn v/s $21.7mn), as even smaller investors that earlier used to look for $5-10mn deals began looking for $20-25mn deals. Also, there was a sectoral shift towards Infrastructure, Telecom & Real Estate,which witnessed the major big ticket deals of the year.

IT/ITES sector was the biggest loser, with investments dropping by 37.5% on YoY basis due to the slower profitability growth forecast. The slowdown in the sector was based on the adverse impact of the over 10% appreciation in the rupee and the depressed conditions in the US economy, which is a major source of revenue for Indian IT companies. Also, most of the big IT firms were not looking to raise funds. However, the sector still managed a record 84 small size deals, mainly in the web-based Information Services Industry and in the BPO/KPO Industry.

Traditional favourites like IT/ITES, Manufacturing and Healthcare together comprised only 18.5% of all investments by value in 2007, compared to 40.6% in 2006, mainly due to better and bigger opportunities in other areas of the economy and comparatively slower growth rates in these 3 sectors.

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