As private equity and venture capital investors struggle to find the right deals (due to high valuations and lack of quality companies), they are preferring to go back to familiar names through follow-on deals and second round of investments in Indian companies. This also helps them reduce the risk of being a first-time investor.
In recent past, there have been a flurry of follow-on and second-round investments. While second-round funding avoids thorough due diligence and give a safe platform to the investor, follow-on deals help investors to strengthen their presence in the company.
Nimesh Salot, Director, Ladderup Corporate Advisory said, "Many investment opportunities get filtered out at various stages of a deal cycle. Once an opportunity (a company) passes through all rigorous tests to get its business model validated and funded then there is a safe assumption that the opportunity is worth considering."
| SECOND ROUND OF PE INVESTMENTS | ||
| Company | Existing investors | New investors |
| Quikr India | Matrix India Fund, Norwest VP | Warburg Pincus |
| Regen Powertech | Summit FVCI, IDFC Private Equity, Everstone | TVS Capital |
| R&R Salons | Helion Venture | Everstone Capital |
| Eye-Q Hospitals | SONG Investment Advisors, Omidyar Network, Google | Helion, Nexus VP |
| AU Financiers India | International Finance Corp | Warburg Pincus |
| Freshdesk Technologies | Accel Partners | Tiger Global Management |
| Carnation Auto | PremjiInvest, IFCI Ventures | Gaja Capital |
Last fortnight, Global private equity firm Warburg Pincus, with existing investors Matrix Partners India, Norwest Venture Partners, participated in $32-million worth fifth round of fundraising by online classifieds company Quikr. Last week, Bangalore-based salon chain R&R Salons raised its second round of PE funding from Everstone Capital and its existing investor, Helion Venture Partners. In March, Warburg Pincus, along with existing investor- International Finance Corp, had invested $50 million in non-banking finance company, Au Financiers India Pvt Ltd.
Dhanpal Jhaveri, CEO, Everstone Capital Advisors said, "Once the business model is established with stable unit economics, we are happy to take execution risk in scaling up, given that our operations team is aware of the typical mistakes made by young companies hungry for growth."
Jagdish Khattar's Carnation Auto raised second-round funding of Rs 85 crore, after raising Rs 108 crore from PremjiInvest and IFCI Ventures. Similarly, Eye-Q Super-specialty Eye Hospitals raised its second round of funding from Helion Venture Partners and Nexus Venture Partners. Eye-Q is already backed by investors such as Song Investment Advisors, Omidyar Networks and Google.
Not only VC funds, but large PE majors are also pumping in more capital to increase their presence in portfolio companies. Sunil Kaul, senior director with Carlyle Group joined the India Infoline board as a non-executive director, after Carlyle increased its stake in the financial services firm to nine per cent from 6.7 per cent through an open market deal.
Rahul Chandra, co-founder and Managing Director, Helion Ventures, said, "The most attractive reason (why we do follow-on deals or subsequent round of funding) is that we would like to increase our ownership as we really like the prospects of the business."
The tough market, where floating a successful IPO is not easy, also forces Indian companies to opt for second and third round of PE/ VC funding.
According to a recent study by SMC Capital, 50 IPOs worth Rs 40,000 crore were called off since 2011 January. The year 2012 has seen 17 IPOs worth Rs 5,900 crore being called off, including of PE-backed companies like Micromax and Embassy Property.
“Second round of funding is linked to speed of closing where portfolio companies can focus on business building than spending time raising capital as existing investors are best placed to understand the value of the business,” added Chandra of Helion.
Agri-logistics company Sohan Lal Commodity Management, which is backed by Nexus Venture Partners and Mayfield, plans to raise about Rs 100 crore in its third round of fundraising, reports say.
