Infrastructure Fuels Indian Growth

The Indian venture capital industry didn’t stay down for long.

After slowing in the aftermath of the global credit crunch in 2009, VC and private equity investment in India accelerated in 2010, fueled by a strong IPO market and robust growth in the broader economy.

In the first three quarters of the year, private equity investment in India totaled $5 billion, up from $4 billion in all of 2009 and reasonably on track to rival the $7.5 billion invested in 2008, according the Emerging Markets Private Equity Association (EMPEA). Investments ran the gamut from familiar sectors of venture focus, such a digital media, security software and cleantech, to industries seeing particularly high growth within India, such as microfinance, business process outsourcing, and basic infrastructure.

As for exits, firms racked up some respectable returns, floating offerings on exchanges in India and abroad as well as securing gains through M&A. But while they were able to take some money off the table, VC and private equity firms, whose investment targets tend to overlap in India, were putting more money into the market, optimistic of even higher returns to come.

“We are seeing exceptional opportunities,” says Naren Gupta, founding partner at Mumbai-based early stage fund Nexus Venture Partners, who cites Internet, agricultural and rural development, and consumer and business services as favored areas of focus.

Seeing additional unmet demand for seed-stage funding, the firm in December launched Nexus Seed, a program that will invest $50,000 to $500,000 in promising startups.

The Bombay Stock Exchange’s barometer Sensex index was on track to end the year with a solid gain, albeit a far smaller one that was routine during the frothier years preceding the financial crisis. Economic forecasts, meanwhile, call for continued sharp rise in GDP.

“India is such an attractive place to invest because of its huge growth,” Rob Chandra, lead investor in India for Bessemer Venture Partners, tells VCJ online affiliate peHUB.com. The overall Indian economy continues to grow at about an 8% annual rate, he says. But considering half of the economy is agriculture, which is a slow-growth industry, sustaining that rate for industry overall means that other sectors are growing at 30% to 40% a year.

India is such an attractive place to invest because of its huge growth.”

Rob ChandraPartnerBessemer Venture Partners

One area that Bessemer and other venture and private equity firms are allocating considerable sums to is infrastructure. Power and roads are two things that the government has made a strong commitment to improving, Chandra says, and a lot of energy companies have gone public and are growing rapidly. One that Bessemer helped incubate nearly four years ago, renewable energy power plant developer Orient Green Power, went public in September on the National Stock Exchange of India. The firm also invested in Indian toll road operator IL&FS Transportation Networks, which went public in March.

Bessemer wasn’t the only firm that saw IPO exits. As of late December, Indian companies had raised $6.4 billion from IPOs in 2010, according to Renaissance Capital, with venture- and private equity-backed offerings featuring prominently on the list. Among the largest debuts came from SKS Microfinance, a leading provider of small loans to poor Indians, which raised $358 million in its July debut on the Bombay Stock Exchange. Backers include Vinod Khosla, George Soros and Infosys Technologies’ founder N.R. Narayan Murthy, according to Reuters.

As for listings on U.S. exchanges, Gurgaon, India-based travel site MakeMyTrip made the biggest splash in its September debut on Nasdaq. Shares soared to nearly triple their initial offer price in the first month of trading before surrendering some gains in November and December. The company previously raised $44 million in venture funding, according to Thomson Reuters (publisher of VCJ) from SAIF Partners, Tiger Management, Helion Venture Partners and Sierra Ventures.

Funds Heat Up

It was also a busy year for fundraising announcements, with new firms rolling out shingles and existing investors returning to LPs for fresh capital. EMPEA estimates that private equity fundraising in India totaled $2.4 billion in the first three quarters of 2010, compared to $4 billion in all of 2009. But given that some of the larger new fund announcements came out in the fourth quarter such fundraising statistics may not reflect the full level of activity.

Among the largest fundraising announcements came in December, when British buyout shop 3i Group told Reuters it is planning a $1.5 billion India fund for infrastructure investments in sectors such as power and roadways. The firm launched a $1.2 billion fund for similar infrastructure investment in India that is now 80% invested. ICICI Venture, the private equity arm of No. 2 Indian lender ICICI Bank, disclosed during the fall that it is looking to raise as much as $750 million from overseas investors for its $1 billion infrastructure fund.

It was also an active year for emerging managers. One, domestic private equity firm Pravi Capital, set up by former ICICI Venture executives, said it plans to raise $200 million to invest as growth capital in privately held Indian companies.

Meanwhile, firms in Europe and the U.S. with operations in India are also looking to step up the pace of investment.

Looking at 2010, India seems to have recovered much faster from the financial crisis as compared to other major economies of the world.”

Amit ChaturvedyVice PresidentSummit Partners

“Looking at 2010, India seems to have recovered much faster from the financial crisis as compared to other major economies of the world,” says Amit Chaturvedy, vice president at growth equity investor Summit Partners, which focuses on technology, health care, education, financial services and consumer products for its Indian investments.

In 2010, the firm made a $30 million investment last spring in Maharashtra, India-based Krishidhan Seeds, one of India’s leading seed companies.

As for 2011, Chaturvedy says, “we see a favorable investment climate as we head into the New Year.”

2010 Notable Deals in India

• Mobile handset provider Micromax Informatics, raised about $43 million early in the year from Sequoia Capital, Sandstone Capital and Madison India Capital. Micromax’s previous investors, including TA Associates, which invested $45 million in the company last year.

Bhartiya Samruddhi Finance Ltd., an Indian microfinance company, raised $26.6 million in new VC funding in a round led by Matrix Partners India.

GupShup, an Indian mobile social network with 26 million users, raised $12 million in second-round funding. Globespan Capital Partners led the round, and was joined by return backers Charles River Ventures and Helion Venture Partners.

iYogi Inc., an India-based provider of remote technical support services, has raised $15 million in third-round funding. Draper Fisher Jurvetson led the round, and was joined by return backers, SAP Ventures and SVB India Capital.

Compiled by Joanna Glasner