2011 has struck a strong note in private equity and venture capital deal flow if data from VCCEdge, financial research platform of VCCircle, is an indicator.
While the first three months of a calendar year is traditionally seen as a busy season for PE/VC dealmakers, this year’s performance is significant as it marks the most active opening quarter in nearly three years. The January-March period in 2011 has seen a total of 99 deals with an announced value of $2.59 billion, as against the 93 deals worth 1.85 billion during the same period last year. This means the first quarter of 2011 has witnessed 38 per cent rise in deal value over the corresponding period last year. Compare this to the previous peak performance of Q1 of 2008 when private equity and venture capital deal-making touched a high of 216 deals worth $5.66 billion.
Even in terms of number of transactions and the disclosed value of deals, it has been the highest (since Q1 2008) in line with the stock market valuations and the global economic drift. The first quarter of 2008 was particularly busy possibly due to the spillover of deals struck in the last quarter of 2007 when the economy was booming and liquidity was at, what pundits would term as, abnormal levels.
With an average of a little over one-deal-a-day, it (Q1 deal volume) did not manage to beat the transaction volumes during the first quarters of 2006-2008. But the mega deal under a two-tiered M&A/PE transaction where Munjals of the Hero Group acquired stake of their long-running JV partner Honda and struck a parallel deal with Bain Capital, and the Singapore sovereign wealth fund GIC bankrolled the transaction by retiring the short-term borrowings for paying out Honda, ensured that it almost matched Q1 2007 in value of deals to become the second best Q1 (after 2008) in the past six years when PE/VC deals gained traction in India.
Law of averages
This also pushed the size of average deal to $32 million or 50% more than Q1 2010 and second only to $40 million in the first quarter of 2008. Moreover, the median deal size or the deal value that separates one half of the transactions from the other by value of deals (thereby neutralising the impact of a few large deals on the average size) touched $11 million, almost the same as the $10-12 million range that it had been in Q1 of the past six calendar years.
However, trawling through the data for the past six years show that the sweet spot for PE/VC deal makers remains within $25 million range or deals close to Rs 100 crore mark.
Deal dynamics
As expected, private equity continued to lead the number as well as the money riding all PE/VC deals. This can be easily linked to the appetite for growth capital from companies which have outgrown the size where they seek venture funds as also the peculiar family business-led corporate profiles in India.
Although that does not obviate the entrepreneurial froth-seeking capital, there is a certain amount of restraint at the early-stage investment level which can be seen in the dwindling angel/seed investments. Angel/seed investment transactions during Q1 2011 were the lowest in the first quarter of the past six years.
But to be fair, VC investments have been as ebullient as PE deals. Deal volumes related to both PE and VC transactions during Q1 2011 was third best to 2008 and 2007, as registered in the past six years. However, the announced value of VC transactions struck a new high at $217 million for the first quarter, as recorded the past six years, surpassing even $200 million worth of deals in 2008.
Deal hotspots
The country’s financial capital Mumbai was, by far, the most happening city for PE/VC deals during the quarter – accounting for a fifth of all deals announced in the first three months of the year. But New Delhi and southern star Hyderabad surpassed it in terms of transaction value announced in the first quarter.
If the Hero-Honda-Bain/GIC transaction is factored out, Hyderabad becomes the most happening city in terms of total value of deals struck in the first quarter, once again proving how the business and entrepreneurial activities in the city is no flash in the pan. However, if we combine the deal activities in Delhi and Gurgaon for all practical purposes (since they belong to Delhi-NCR), it beats Hyderabad and narrows the gap with Mumbai as the most happening market for PE/VC firms.
As for the states, Maharashtra came up trumps, followed by Andhra Pradesh, Delhi, Karnataka and Gurgaon. Interestingly, as many as eight out of the 28 PE/VC deals in Maharashtra were outside Mumbai, showing how deals are also being struck in other parts of the state. In contrast, the action was almost totally limited to the key cities when it came to other top states.