Private equity funds (PE funds) seem to be staging a comeback after their near withdrawal from Indian economic landscape in the wake of global economic meltdown in 2008. Deal activities have picked up significantly since last year and are expected to edge higher towards the end of the year.
According to recent studies, merger and acquisition (M&A) activities in the country more than doubled in the first month of 2010 as deals worth about Rs 13,950 crore were announced, signifying emergence of the country's economic environment after tough 18 months.
January saw as many as 29 domestic deals worth $2,3030 million compared to 14 transactions worth $589 million in January 2009. Telecom, logistics and banking and finance and insurance were the most targeted sector for investment with deals worth $ 2180 million, $ 164 million and $117 million, respectively, according to the study conducted by financial research services provider VCEdge.
In terms of investment, even though logistics sector came second to telecom, it is found to be increasingly attracting the attention of lot of PE funds. With traditional avenues for investments like real estate for residential and commercial segments still in doldrums, PE funds are looking at new avenues and are betting on the logistics sector.
Indian logistics sector is a collection of nearly 20 subsectors extending from ocean shipping to ports, from express courier to container rail, and from 3PL to warehousing and distribution. Even though the sector is highly fragmented, this very nature is also said to attract the PE funds, who have been playing an important part in industry consolidation by focusing on aggregating smaller players and building scale through numerous acquisitions. In fact, India has emerged as an important geography from the perspective of the PE interest in the transportation and logistics sector since the beginning of 2008. While the year
2008 saw 23 deals alone, 2009 was an year of caution for most PE players in India.
"It is difficult to ascertain the total amount that the funds have deployed in the logistics sector," said Vikram Utamsingh, executive director and head - markets and private equity at KPMG. "But," he added, "there would have been some 10 to 15 transactions in the logistics sector to date and so the amount invested would be in the range of $300 to 500 million."
"As the logistics sector emerges from its worst time ever, it is stronger, leaner and wiser but most of all ready for its next level of PE-backed growth," said Gautami Seksaria, founder and managing partner, Supply Chain Leadership Council, which has been fostering growth of the sector though a variety of forums.
According to industry players, the sector could see PE investments close to $1 billion in the next three years. PE funds are expected to pump in about 10-15% of their total investments in warehousing and logistics over the next two years.
According to real estate consultancy firm Cushman and Wakefield, warehousing activities account for about 20% of the total Indian logistics industry and offer tremendous growth potential. The warehousing segment of the logistics
industry is estimated to grow from $20 billion in 2007-08 to about $55 billion by 2010-11, growing at the rate of 35-40% per year.
Correcting a general perception that funds are facing financial crunch, Mr Utamsingh said that there are no such constraints. "In fact there are many PE funds that have a lot of "dry powder" as they did not invest much in 2009. Further, there have been several ones who raised funds in 2008 and 2009 and hence have a lot of capital to deploy. For example, Sequoia Capital raised $700 million for India, India Value Fund raised $ 725 million for India, Avigo Partners raised $150 million, CX Partners raised $ 200 million, Zephr Peacock raised $85 million. Some domestic funds also raised like Aditya Birla group - Rs 625 crore. So there are plenty of funds to deploy. But PE firms have become more cautious about investing and there has been a key shift from momentum investing to fundamental investing. There are still over 200 active PE funds in India including global funds like KKR, Apollo, TA Associates, Advent, who started their offices in India in 2009."
And for logistics companies looking to get that kind of money, he has this advice: "The companies need to shed their current image and professionalize or at least corporatise. They need to develop better governance principles so that they become more attractive for PE.