Private equity(PE) and venture capital(VC) deal activity sizzled in the first quarter of 2010 with both number of transactions and value of deals shooting past last year’s level but the subdued activity in the three previous quarters ensured the financial year ended March’10 continued to see ‘PE/VC recession’, as per data compiled by VCCEdge- the financial research platform of VCCircle.
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Deal volumes rose 26% to 82 in the Jan-Mar’10 quarter over the year ago period while transaction values almost tripled to $1.8 billion, the highest level in almost two years. The previous biggest quarter in terms of total value of PE/VC deals in India was July-Sept, FY08, just preceding the Lehman Bros bankruptcy filing, when $3.3 billion worth of deals were struck.
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To be fair, the largest deal last quarter $425 million deal in Asian Genco by Morgan Stanley led consortium pulled up the overall values. Deal volumes slowed marginally from Oct-Dec FY09 quarter when 99 deals were struck.
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However, PE/VC dealmaking has still not completely come out of the woods. For the twelve months ended March’10, number of PE/VC deals fell by a fifth to 317 over the year ago period. The total value of deals dropped by a quarter in the same period and also reflects in the decline in average value of PE/VC deals from $26.2 million to $21.2 million over the last two years.
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The median deal values also shrunk to just $8.9 million last year from $10.8 million in FY09. Shrinking average and median deal values show investors are still not willing to take big bets and are restricting themselves to small ticket size transactions.
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Looking closer at the type of deals throws a distinct picture. Angel investments has been the least affected by the slowdown in the economy which has also impacted overall investment climate. Volume of angel deals has declined marginally to 12 deals in FY10 compared to 14 and 13 deals in the previous two financial years.
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VC transactions, which managed to hold on in FY09 despite significant erosion in stock valuations in India during the year, finally caught cold in FY10 with VC deals declining by a quarter to 78 compared from 102 transactions.
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Pure PE transactions, which was the first to get the shock of global financial crisis, shrunk for the second consecutive year. PE deal volumes dropped by a fifth to 227 during FY10 after shrinking by a third in FY09 having hit a peak of 414 deals in the year ended March FY08.
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The picture changes further when it comes to value of deals. All types of investments saw a decline in total value of transactions struck last year over FY09. Angel investments, which was relatively immune and has been the least affected to the slowdown, has dropped 76% over the last two years.
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PE deal values has also dropped 71% from its peak two years ago. After dropping by half in FY09 it declined by a quarter last year. VC deals in contrast rose 33% in FY09 even as deal volumes stayed put and overall investment sentiments remained cautious. But VC deal value almost halved in FY10.
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Sectors that saw same or more PE/VC deal volumes in FY10 over FY09 include consumer staples, energy, healthcare, telecom and utilities--- clearly pointing how investors are sticking to domestic consumption theme as of now.
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IT sector transactions have shrunk significantly from 94 deals in FY09 to 57 deals in FY10 when it shared the top slot with industrials sector. Another big change last year was interest in utilities where the number of transactions more than doubled to 20. This could be a reflection of power generation firms striking pre IPO deals ahead of their public float.
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In terms of transaction values, financials continued to lead the charts. Although total deal value halved to $1.14 billion in FY10 from $2.39 billion the previous year, it remained by far the biggest sector in attracting PE/VC money. Among others, telecom remained the sector with the highest average deal size, a reflection of rich valuations in the sector despite a correction in the stock market.