Global Investors Eye The Indian Pie
EmPower Research
July 31, 2007
By Shoma Bakre & Sujatha Gopal
Attractive Destinations For Investors
In a survey conducted by A.T. Kearney, global executives indicated a greater future for investing in emerging markets than in industrialized countries. It found that a majority of the top 10 destinations most attractive to corporate investors are emerging markets, including China, Mexico, Poland, India, Russia and Brazil. Emerging markets were rated most attractive for off shoring IT and business processes and also for first-time investments. Lower labor costs and more promising returns in developing markets have led investors to favor emerging market destinations, in particular for off shoring IT and business processes.
Another international survey of 175 fund managers conducted by Standard & Poor’s, placed India as the second most preferred market among the BRIC (Brazil, Russia, India and China) countries after Brazil. According to the latest Foreign Direct Investment Confidence Index based on a survey of executives from the world's largest companies, conducted by global management consulting firm A.T. Kearney, China has widened its lead over the U.S. and other investment destinations worldwide as the most preferred location for foreign direct investment.
Yet another survey conducted among 505 venture capitalists worldwide by Deloitte revealed that 53 percent of the respondents intend to expand their global investment focus, with China and India identified as the two top foreign countries of interest over the next five years. Both countries were seen as places where it is less expensive to build businesses, where there is an emerging entrepreneurial culture, and where there is high quality deal flow.
Today, Asia has become the engine of global economic growth promising a large population in a demographic "sweet spot", a high savings rate, and an increasing bias toward consumption. Although this transformation is still in its early stages, marked by periods of rapid advancement as well as periods of relative stagnation, Asia is steadily becoming an economic powerhouse. It is no doubt a fascinating time for Asia watchers everywhere in the world. Not only is Asia witnessing this unprecedented economic growth, but is also seeing a new momentum toward Asian regional integration as neighboring economies strive to improve their competitiveness and manage their shared challenges. Within this region, India has been recently elevated to be one of the strategic hubs and a very attractive destination for investors.
Why India?
A variety of factors have contributed towards India fast becoming a preferred destination for private investment and for planting India firmly in the big league. Indian industry no longer seeks high tariffs and protection to avoid competition from imports. Currently, the confidence level is high with a general upbeat “can do” attitude that has resulted in strong corporate performance, which in turn has attracted a return of the Indian diaspora. Among the factors prompting this general good feeling, the most important ones are the strong macroeconomic fundamentals – sustained high growth in the services sector which contributes 52% of the country’s GDP. This growth, coupled with low inflation, historic low interest rates, a stable exchange rate and a comfortable balance of payment (BoP) position backed by record inflows and foreign exchange (forex) reserves has served to strengthen the Indian economy significantly. Investors now see new opportunities in India and are thus refocusing their investment strategies.
Current Investment Trends in India
Growing businesses always require capital. There are a number of different ways to fund growth, the choices being: funding from venture capitalists (VCs) and angel investors, or in the form of mergers and acquisitions, and private equity (PE). Investors have different operating approaches. These differences may relate to the location of the business, the size of the investment, the stage of the company and industry specialization.
VC Funding: India on their radar
Investment by venture capitalists in India seems to be climbing new heights. This can easily be gauged from the fact that just in the second quarter of 2007 venture capital firms have invested about $112 million across 19 deals in India. Prominent venture capital firms already have offices set in India to identify potential winners and as the India success story grows so does the attraction of newer players. Consider the case of Clearstone Venture Partners, a leading early stage venture capital firm. With US$650 million of committed investment capital Clearstone sees India as a favorable destination. Currently some of the favorite sectors of VCs appear to be IT, BPO, software and hardware products, telecom, and consumer internet.
M&A: Coming of Age
Mergers and acquisitions in India, for the first half of 2006, collectively amounted to deals worth US $25.6 billion. The key drivers fuelling this activity were entry into new markets, establishment of leadership positions for existing players, and extension of domain knowledge by acquisition of know-how. The year 2007 is just about half done, but it’s already been a record year for mergers and acquisitions in India. There has been equity deals worth over $50 billion from January through May, according to data from Grant Thornton. Indian businesses reported 287 strategic mergers and acquisitions worth $46.8 billion and 165 private equity deals worth $5.1 billion, the accounting and advisory company said. Tech businesses captured the largest proportion of deal value last year at 14%. This year, some of the largest investments have been in telecommunications and steel.
PE Investment: Flavor of the season
Initially private equity came into India in the form of early stage/venture capital, particularly in the IT and IT-enabled services, and telecom sectors. Although until 2003 ITES accounted for almost half of all private equity investment, that scenario is now changing. What is evident now is a growing interest among PE investors in real estate, micro credit, internet based services (e.g. online travel). Some of the other emerging sectors include CROs, pharma retailing, digital media & digital movie solutions, purchase of distressed assets, retail, education, and infrastructure.
Incidentally, India has pipped China on the PE turf for the first time. The country bested China in private equity investments for the first six months of 2007, and currently ranks second on the Asian (including Japan) PE investments chart. PEs continued to buy the India story while a few Asian favorites like South Korea saw setbacks.
According to Centre for Asia Private Equity Research data, India has seen $3.7 billion in PE investments during January-June, 2007. This puts it just behind Japan, which drew PE funds worth $4.91 billion, but ahead of China’s (including Hong Kong) $2.6 billion in the same period. Also noteworthy is the fact that the average deal size in India is on the rise. The average deal size for the first half of 2007 was $43 million compared to $31 million for the first half in 2006. The largest deal in the country thus far in 2007 is $650 million, which is the Carlyle Group’s commitment to Housing Development Finance Corp.
Investment Strategies of A Few Players
As India is now rife with investment opportunities, investors have adopted various strategies in the quest of obtaining significant return on investments (RoIs). Warburg Pincus does not spend any time seeking out early-stage companies or “funky” technology. The firm generally sticks to “the tried, true, big and stock-market listed companies” as they are less risky. This strategy works in India as the pent-up demands of a billion people leave plenty of room to grow for even the largest conglomerates.
Crestview focuses on contrarian investments with a keen lookout for change due to dislocation by new technology, services or products. Religare has joined hands with US-based investment firm Evercore Partners to set up a $150 million private equity fund targeting India-based high-growth and mid-sized private equity investment opportunities in segments such as healthcare, retail, financial services, manufacturing, auto-components and infrastructure in tier II and III cities. The fund will look at investment opportunities in small and medium enterprises in segments that are under-represented in the stock exchange but have growth potential.
Seth Freeman, co-founder and CEO of EM Capital Management described how in India his firm uses quantitative tools to sift through the country's 7,000 listed companies in search of opportunities as many of the listed companies in India act more like privately held firms because they are under tight control, usually by founders. "Our strategy is finding and choose companies that are willing to embrace global corporate governance and other buzzwords that will create more liquidity in their stocks", says Freeman.
Hedge Funds: Bouyancy around
According to HedgeFund Intelligence, a global data bank, there are around 20 India-specific hedge funds; about 700 Asia-directed hedge funds with direct or indirect exposures in Indian stocks; and the hedge fund assets directed towards Asian equities was estimated at about $115 billion in 2005. Hedge funds are coming indirectly through participatory notes in India due to regulatory reasons. Hedge funds, which contributed to about 50 per cent of the inflow into Indian equities in 2005, are considering fresh entries. So far, we have not really uncovered any major investment in particular verticals by hedge funds in India, but we have found some interest in real estate, hospitality, and IT. We estimate that till regulatory policies by SEBI are in place, hedge funds will not make any definitive moves towards any particular industry sectors. According to Eureka Hedge, a global hedge fund tracking firm, two India-focused hedge funds, India Capital Fund and Atyant Capital India Fund, were among the top five best performing Asian hedge funds in September 2006. Other hedge funds operating in India include Boyer Allan India Fund and Avatar India Opportunities Fund. Boyer Allan India manages about $1 billion worth of investments in India.
Some Upcoming Sectors Which Could Be Attractive To Investors
Pharma Retailing: Healty proposition
The domestic pharma retail market is an emerging sector which could very well promise sweet returns to investors. Today, this market is valued at close to $11 billion and could well double in the next five years. An important development in this sector is the plans of Reliance-Anil Dhirubhai Ambani Group to develop nationwide pharmacy distribution units by setting up JVs with All India Organization of Chemists and Druggists (AIOCD) which has over five lakh pharma retail outlets. Another significant development in this arena is the JV between Pantaloon Retail India, a part of the Future Group, and Manipal Health Systems, a part of the south India-based Manipal Group, which will operate pharmacies (selling medical products) and provide medical services across the country under the 'Manipal Cure & Care' retail brand.
Endearing Clinical Trial Outsourcing Market
Another potentially attractive investment sector is India's clinical research industry, which was worth $100m in 2005-2006 and is expected to reach $1billion by 2008 at the CAGR of 40-50%. A study by the Confederation of India Industry has predicted that the clinical trials market will be worth between $ 500 million and $1 billion by 2010. Trials are going on in areas such as psychiatry, neurology, cardiology, gastroenterology, endocrinology, dermatology and ophthalmology.
Conclusion: India, kindling interest
Suddenly India seems to have emerged into the land of opportunities wooing investors from all over the globe. The total amount of foreign investment in India is less than 10 percent of the total foreign investment in China, even though there is ample room for additional foreign investment in India. According to Nandan Nelivigi, White & Case LLP, in India, the power sector needs $75 billion of additional foreign investment, the telecom sector needs $25 billion of additional foreign investment, and the airports, seaports and roads need $50 billion of additional foreign investment. With so many investment opportunities to choose from, investors really need to do their homework in order to be able to pick the right target to invest in.
Sources:
www.indiavca.org
www.atkearney.com
www.thehindubusinessline.com
www.deloitte.com
www.evalueserve.com
www.altassets.net
www.thehindubusinessline.com
www.pwc.com
www.economictimes.com
www.theeconomist.com
Attractive Destinations For Investors
In a survey conducted by A.T. Kearney, global executives indicated a greater future for investing in emerging markets than in industrialized countries. It found that a majority of the top 10 destinations most attractive to corporate investors are emerging markets, including China, Mexico, Poland, India, Russia and Brazil. Emerging markets were rated most attractive for off shoring IT and business processes and also for first-time investments. Lower labor costs and more promising returns in developing markets have led investors to favor emerging market destinations, in particular for off shoring IT and business processes.
Another international survey of 175 fund managers conducted by Standard & Poor’s, placed India as the second most preferred market among the BRIC (Brazil, Russia, India and China) countries after Brazil. According to the latest Foreign Direct Investment Confidence Index based on a survey of executives from the world's largest companies, conducted by global management consulting firm A.T. Kearney, China has widened its lead over the U.S. and other investment destinations worldwide as the most preferred location for foreign direct investment.
Yet another survey conducted among 505 venture capitalists worldwide by Deloitte revealed that 53 percent of the respondents intend to expand their global investment focus, with China and India identified as the two top foreign countries of interest over the next five years. Both countries were seen as places where it is less expensive to build businesses, where there is an emerging entrepreneurial culture, and where there is high quality deal flow.
Today, Asia has become the engine of global economic growth promising a large population in a demographic "sweet spot", a high savings rate, and an increasing bias toward consumption. Although this transformation is still in its early stages, marked by periods of rapid advancement as well as periods of relative stagnation, Asia is steadily becoming an economic powerhouse. It is no doubt a fascinating time for Asia watchers everywhere in the world. Not only is Asia witnessing this unprecedented economic growth, but is also seeing a new momentum toward Asian regional integration as neighboring economies strive to improve their competitiveness and manage their shared challenges. Within this region, India has been recently elevated to be one of the strategic hubs and a very attractive destination for investors.
Why India?
A variety of factors have contributed towards India fast becoming a preferred destination for private investment and for planting India firmly in the big league. Indian industry no longer seeks high tariffs and protection to avoid competition from imports. Currently, the confidence level is high with a general upbeat “can do” attitude that has resulted in strong corporate performance, which in turn has attracted a return of the Indian diaspora. Among the factors prompting this general good feeling, the most important ones are the strong macroeconomic fundamentals – sustained high growth in the services sector which contributes 52% of the country’s GDP. This growth, coupled with low inflation, historic low interest rates, a stable exchange rate and a comfortable balance of payment (BoP) position backed by record inflows and foreign exchange (forex) reserves has served to strengthen the Indian economy significantly. Investors now see new opportunities in India and are thus refocusing their investment strategies.
Current Investment Trends in India
Growing businesses always require capital. There are a number of different ways to fund growth, the choices being: funding from venture capitalists (VCs) and angel investors, or in the form of mergers and acquisitions, and private equity (PE). Investors have different operating approaches. These differences may relate to the location of the business, the size of the investment, the stage of the company and industry specialization.
VC Funding: India on their radar
Investment by venture capitalists in India seems to be climbing new heights. This can easily be gauged from the fact that just in the second quarter of 2007 venture capital firms have invested about $112 million across 19 deals in India. Prominent venture capital firms already have offices set in India to identify potential winners and as the India success story grows so does the attraction of newer players. Consider the case of Clearstone Venture Partners, a leading early stage venture capital firm. With US$650 million of committed investment capital Clearstone sees India as a favorable destination. Currently some of the favorite sectors of VCs appear to be IT, BPO, software and hardware products, telecom, and consumer internet.
M&A: Coming of Age
Mergers and acquisitions in India, for the first half of 2006, collectively amounted to deals worth US $25.6 billion. The key drivers fuelling this activity were entry into new markets, establishment of leadership positions for existing players, and extension of domain knowledge by acquisition of know-how. The year 2007 is just about half done, but it’s already been a record year for mergers and acquisitions in India. There has been equity deals worth over $50 billion from January through May, according to data from Grant Thornton. Indian businesses reported 287 strategic mergers and acquisitions worth $46.8 billion and 165 private equity deals worth $5.1 billion, the accounting and advisory company said. Tech businesses captured the largest proportion of deal value last year at 14%. This year, some of the largest investments have been in telecommunications and steel.
PE Investment: Flavor of the season
Initially private equity came into India in the form of early stage/venture capital, particularly in the IT and IT-enabled services, and telecom sectors. Although until 2003 ITES accounted for almost half of all private equity investment, that scenario is now changing. What is evident now is a growing interest among PE investors in real estate, micro credit, internet based services (e.g. online travel). Some of the other emerging sectors include CROs, pharma retailing, digital media & digital movie solutions, purchase of distressed assets, retail, education, and infrastructure.
Incidentally, India has pipped China on the PE turf for the first time. The country bested China in private equity investments for the first six months of 2007, and currently ranks second on the Asian (including Japan) PE investments chart. PEs continued to buy the India story while a few Asian favorites like South Korea saw setbacks.
According to Centre for Asia Private Equity Research data, India has seen $3.7 billion in PE investments during January-June, 2007. This puts it just behind Japan, which drew PE funds worth $4.91 billion, but ahead of China’s (including Hong Kong) $2.6 billion in the same period. Also noteworthy is the fact that the average deal size in India is on the rise. The average deal size for the first half of 2007 was $43 million compared to $31 million for the first half in 2006. The largest deal in the country thus far in 2007 is $650 million, which is the Carlyle Group’s commitment to Housing Development Finance Corp.
Investment Strategies of A Few Players
As India is now rife with investment opportunities, investors have adopted various strategies in the quest of obtaining significant return on investments (RoIs). Warburg Pincus does not spend any time seeking out early-stage companies or “funky” technology. The firm generally sticks to “the tried, true, big and stock-market listed companies” as they are less risky. This strategy works in India as the pent-up demands of a billion people leave plenty of room to grow for even the largest conglomerates.
Crestview focuses on contrarian investments with a keen lookout for change due to dislocation by new technology, services or products. Religare has joined hands with US-based investment firm Evercore Partners to set up a $150 million private equity fund targeting India-based high-growth and mid-sized private equity investment opportunities in segments such as healthcare, retail, financial services, manufacturing, auto-components and infrastructure in tier II and III cities. The fund will look at investment opportunities in small and medium enterprises in segments that are under-represented in the stock exchange but have growth potential.
Seth Freeman, co-founder and CEO of EM Capital Management described how in India his firm uses quantitative tools to sift through the country's 7,000 listed companies in search of opportunities as many of the listed companies in India act more like privately held firms because they are under tight control, usually by founders. "Our strategy is finding and choose companies that are willing to embrace global corporate governance and other buzzwords that will create more liquidity in their stocks", says Freeman.
Hedge Funds: Bouyancy around
According to HedgeFund Intelligence, a global data bank, there are around 20 India-specific hedge funds; about 700 Asia-directed hedge funds with direct or indirect exposures in Indian stocks; and the hedge fund assets directed towards Asian equities was estimated at about $115 billion in 2005. Hedge funds are coming indirectly through participatory notes in India due to regulatory reasons. Hedge funds, which contributed to about 50 per cent of the inflow into Indian equities in 2005, are considering fresh entries. So far, we have not really uncovered any major investment in particular verticals by hedge funds in India, but we have found some interest in real estate, hospitality, and IT. We estimate that till regulatory policies by SEBI are in place, hedge funds will not make any definitive moves towards any particular industry sectors. According to Eureka Hedge, a global hedge fund tracking firm, two India-focused hedge funds, India Capital Fund and Atyant Capital India Fund, were among the top five best performing Asian hedge funds in September 2006. Other hedge funds operating in India include Boyer Allan India Fund and Avatar India Opportunities Fund. Boyer Allan India manages about $1 billion worth of investments in India.
Some Upcoming Sectors Which Could Be Attractive To Investors
Pharma Retailing: Healty proposition
The domestic pharma retail market is an emerging sector which could very well promise sweet returns to investors. Today, this market is valued at close to $11 billion and could well double in the next five years. An important development in this sector is the plans of Reliance-Anil Dhirubhai Ambani Group to develop nationwide pharmacy distribution units by setting up JVs with All India Organization of Chemists and Druggists (AIOCD) which has over five lakh pharma retail outlets. Another significant development in this arena is the JV between Pantaloon Retail India, a part of the Future Group, and Manipal Health Systems, a part of the south India-based Manipal Group, which will operate pharmacies (selling medical products) and provide medical services across the country under the 'Manipal Cure & Care' retail brand.
Endearing Clinical Trial Outsourcing Market
Another potentially attractive investment sector is India's clinical research industry, which was worth $100m in 2005-2006 and is expected to reach $1billion by 2008 at the CAGR of 40-50%. A study by the Confederation of India Industry has predicted that the clinical trials market will be worth between $ 500 million and $1 billion by 2010. Trials are going on in areas such as psychiatry, neurology, cardiology, gastroenterology, endocrinology, dermatology and ophthalmology.
Conclusion: India, kindling interest
Suddenly India seems to have emerged into the land of opportunities wooing investors from all over the globe. The total amount of foreign investment in India is less than 10 percent of the total foreign investment in China, even though there is ample room for additional foreign investment in India. According to Nandan Nelivigi, White & Case LLP, in India, the power sector needs $75 billion of additional foreign investment, the telecom sector needs $25 billion of additional foreign investment, and the airports, seaports and roads need $50 billion of additional foreign investment. With so many investment opportunities to choose from, investors really need to do their homework in order to be able to pick the right target to invest in.
Sources:
www.indiavca.org
www.atkearney.com
www.thehindubusinessline.com
www.deloitte.com
www.evalueserve.com
www.altassets.net
www.thehindubusinessline.com
www.pwc.com
www.economictimes.com
www.theeconomist.com
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