Private Equity (PE) investment into India's small and medium enterprises (SMEs) continues to fall. It declined from $1,295.73 million across 176 deals in 2012, to $970.24 million across 132 deals in 2013 (year to date) - a fall of 25 per cent, according to data compiled by Venture Intelligence, a Chennai-based research company that tracks private equity, venture capital and M&A in India.
Comparable figures for 2011 were $1,542.46 million across 202 deals, and for 2010, $1,257.77 million across 169 deals. Venture Intelligence defines Indian SMEs as enterprises with annual revenues of up to Rs 100 crore.
PE investors said they are in wait-and-watch mode owing to the slowdown, and this trend would continue for the next couple of years. However, when the economy improves, SMEs would be a good bet for funds that are already in the process of raising money from their investors to launch new SME-focused funds, they added. (DOWNWARD SPIRAL)
A partner in a PE fund said funds that had invested earlier are yet to report any profitable exits. The others hurdles are information gaps and returns not being free of risk.
He said enterprises can still attract investors, provided they showcase the unique advantages they can bring to the table. For instance, some branded ready-to-cook products are attracting interest, thanks to their uniqueness backed by innovation, he added.
A senior official from an advisory firm that helps SMEs raise money from PEs said that funds with an appetite for deals of up to $30 million were major contributors to the slowdown in investments.
"PE funds are not able to raise second-round funding from their investors, who have negative perceptions about India," he said. He added that fewer than 20 per cent of the funds that had invested in deals of up to $30 million four or five years ago had made money.
However, some investors - including International Finance Corporation, the investment arm of World Bank - are bullish and continue to support the SME sector. Recently, IFC's director, South Asia, Serge Devieux told Business Standard that IFC may invest $400 million in equity deals in India in the current financial year. It recently decided to support some lenders and investors who will focus only or mainly on SMEs.
Its most recent deal was a $120 million loan to Yes Bank, which is planning to increase its exposure to SMEs. IFC is also planning to invest $25 million in Gaja Advisors Ltd, which is planning to launch its second fund of $250 million. This will focus on providing growth capital to mostly unlisted mid-market companies and SMEs.
IFC has invested another $15 million in LotusPool I, a $125 million fund that LotusPool Capital expects to launch soon, and which will invest in scalable SMEs that are at the early-expansion phase of their growth cycle. Its main focus will be southern India and emerging states with low private equity penetration.
Subbarao Telidevara, founder, LotusPool Capital Mauritius, said "LotusPool is focussed on and structured to enhance exits of investments. Buyouts and control deals are part of this strategy".
"Small and mid-size businesses often require revolving short-term debt, but have little access to such financing from banks; so we can provide short-term (three to 12 months) debt to our profitable portfolio companies with a strong cash flow," the fund said.
PE executives stress that if SMEs are to attract investments in the current scenario, entrepreneurs need to make a strategic shift in their mindset - they must want to grow exponentially and should leverage the managerial expertise of investors.
They are also of the view that SMEs earlier had unrealistic expectations, which need to be tempered in the light of the slowdown. However, they are confident there will be a large supply of PE money coming to India in the future.
