PE deal size doubles in 2 yrs

With global investors buying into the India growth story, the size of private equity deals in the country has doubled in the last two years.

While the average private equity deal size was $15-16 million in 2005, it jumped to $25 million in 2006 and $30.8 million in the first six months of 2007, according to data from research outfit Evalueserve and professional services firm Ernst & Young.

Experts say this is because of a larger number of players entering the Indian market. There are 461 funds operating in India now, against less than a hundred two years ago.

They say there is every indication that total private equity investment in 2007 will cross $10 billion, up from $7.5 billion in 2006.

Recent research by Evalueserve showed that there were more than 40 US firms that have raised or are in the process of raising capital in the range of $40-400 million each to invest in start-ups and early- or mid-stage companies in India.

The rush is driven by the prospects of attractive returns. "Some funds are doing business on a 40 per cent return. But nobody wants to think less than a 25 per cent return," said one private equity player.

"The increase in the average deal size is a sign of maturity of Indian companies. It also reflects the significance of growth capital. Companies are now willing to take more growth capital to fund operations," said Atul Mehta, partner, Ernst & Young.

In the first quarter of 2007, Mehta said 95 per cent of private equity was invested in companies in the growth stage "� that is, those that have typically been operational for five to seven years and require capital to grow.

The rise in the average deal size is also a result of rising valuations. With the Bombay Stock Exchange's bellwether Sensex recording a 2,195.14-point rally (17.62 per cent) in the first quarter of the current fiscal, promoters of unlisted firms are demanding a higher valuation.