Year in Review: India

After several years of steady increase, venture investment in India radically reversed course in 2009.

Over the first three quarters of the year, venture capital firms invested just $201 million in 46 deals, according to research firm Venture Intelligence India. That’s a precipitous drop from the same period a year ago, when firms invested $790 million in 124 deals.

U.S.-based firms, in particular, really pulled back. They invested in just 59 Indian-based companies as of Dec. 7, compared to 120 in 2008, according to Thomson Reuters (publisher of VCJ). For example, Sequoia Capital backed eight Indian companies in 2008, but just four in 2009, while Kleiner Perkins Caufield & Byers and Mayfield Fund each did five Indian investments in 2008, but only one each in 2009 (see table).

Market observers say the decline has less to do with India’s economic outlook than with the global financial crisis. As the credit crunch peaked in 2008 and early 2009, limited partners curtailed new commitments to India-focused funds, and existing investors held on more tightly to remaining cash reserves.

“A lot of the people who dabbled in private equity in India are no longer in the game,” says Shad Azimi, founding partner at Vanterra Capital, a direct investor and fund-of-funds investor that co-invests with Delhi-based private equity fund Jacob Ballas Capital India. Consider Battery Ventures, which said in October that it would close its Mumbai office and instead invest from the U.S.

Despite the slowdown last year, a number of VCs expect to see the market heat up in 2010. “We haven’t done a deal in 18 months, but we’ve got three deals in letter-of-intent stage now,” Azimi said in early December.

Still, fresh capital remains scarce. Last year was a bleak period for new fund commitments. Not a single U.S. fund focused on India was raised last year, according to Thomson Reuters. It’s a stark contrast to 2008, when U.S.-based venture firms were stepping over each other to expand their presence in India. Sequoia Capital alone raised $725 million for a second India-focused growth fund last year, just two years after raising a $400 million fund. Early stage investors IDG Ventures, Nexus India Capital and balanced stage venture firm Helion Venture Partners also closed second funds of $300 million, $220 million and $210 million, respectively, in 2008.

Economic recovery should provide a boost for venture and private equity fund-raising next year, according to a December report from Prequin, a research firm. It says that currently, around 15 India-focused PE funds are raising in excess of $5 billion. (The private equity and venture asset classes tend to meld in India, with venture firms commonly investing in established businesses seen as highly scalable.)

We haven’t done a deal in 18 months, but we’ve got three deals in letter-of-intent stage now.

Shad Azimi

Venture deal making, meanwhile, has been sparse, though the pace picked up slightly in the third quarter. Venture Intelligence says venture firms invested $77 million over 17 deals in India in the third quarter, an increase from $64 million invested in 17 deals in Q2. Still, Q3 was down sharply from the same quarter a year earlier, when VCs poured $298 million into 55 deals. “We expect the investing momentum to pick up even further,” Sudhir Sethi, a managing director for IDG Ventures India, said last fall.

Some of the year’s largest deals included a $100 million round for Ind-Barath Power, an operator of coal and biomass power plants whose backers include Bessemer Venture Partners and Sequoia; an $18 million round for Shalivahana Green Energy, a developer of renewable energy projects backed by Axis Private Equity, IL&FS Investment Managers and Khaleej Finance & Investment; and a $10 million round for Itz Cash, a prepaid card provider backed by Intel Capital, Lightspeed Venture Partners and Matrix Partners India.

In terms of sector interest, VCs continue to hunt for deals in infrastructure. “The traffic is abysmal,” Azimi says. “You share the road with goats and camels.” It stands to reason, then, that lots of investment continues to go to building roads, as well as other infrastructure projects, such as hospitals and subways, he says.

Azimi is also bullish about companies that meet domestic consumer demand. “You have middle-class Indians who need credit cards, washer-dryers and cars,” he says. “There’s a lot of companies that benefit from that growing demand.”

While venture investment may be down, India’s broader economy looks robust. Growth is projected to reach 7% in 2010 and 7.5% in 2011, according to a November report from the Organization for Economic Cooperation and Development. India’s stock markets are also on a tear. The Bombay Stock Exchange’s Sensex index has more than doubled from its March lows.

As of December, according to Prime Database, Indian companies had raised $3.18 billion from IPOs. Auto company Tata Motors, engineering firm Larsen & Toubro and the State Bank of India all completed offerings that each brought in more than $600 million, says Azimi. Azimi’s Vanterra Capital benefited from the market’s hunger for IPOs, with portfolio company Mahindra Holiday Resorts completing a $50 million offering.

But Azimi worries that easy access to public markets may make some private companies less willing to take venture and tap public markets directly. “When people ask how competitive India is, we say we actually don’t find it competitive in terms of other private equity players,” he says. “We find the biggest competition to be the public markets.”

Additional reporting by Alexander Haislip.