Many traditional Venture Capital firms based in the United States and Europe are already investing US$ 10 million or more today in India, and hence, the separation between venture capital and private equity investment in India has become very blurred. This analysis considers the combined investment made by these two groups from 1996-2006.

Risk Capital Foundation seems to be the first VC-PE firm to start operations in India in 1975. During 1976-1995, domestic financial institutions like Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Industrial Credit and Investment Corporation of India (ICICI Bank) were some of the few private organizations that provided any Venture Capital or Private Equity capital, and the actual investment made by them was also negligible. During the period 1996-2000, several international and domestic VC and PE firms raised capital internationally and started investing tiny amounts in India. For example, the total investment in India made by these firms was only US $20 million in 1996 and US $80 million in 1997.

Even though PE-VC investment was only $20 million in 1996 and $80 million in 1997, the pace of growth was very healthy largely due to the worldwide dot-com boom. Unfortunately, because this growth was driven by of the dot-com bubble, it came crashing down soon after NASDAQ lost 60% of its value in 2000 - for example, the total number of deals declined from 280 in 2000 to 110 in 2001 - and this investment reached its low point both in the number of deals and total value in 2003.

From 2003 onwards, India's economy started growing at 8% to 9% annually in real terms and at 13% to 15% in nominal terms (including inflation), and since some sectors (e.g., the services sector and the high-end manufacturing sector) started growing at 10% to 14% a year in real terms and 15% to 20% in nominal terms, VC-PE firms started investing again in 2004. For example, they invested US $1.65 billion in 2004, surpassing the investment of $1.16 billion in 2000 by 42%.

In addition, the exit climate for private equity investment in India improved significantly, and especially over the last two years, the market witnessed several large and well-publicized exits. In addition to public equity markets (e.g., Genpact listing on NYSE and EXL on NASDAQ), private equity firms have also used secondary buy-outs or sale to other private equity firms as exit.

Outlook for VC-PE investment during 2007-2010
Our analysis shows that if the current trends continue, India would receive US $13.5 billion in Private Equity funding during 2007, thereby becoming one of the top seven countries receiving such funding in 2007. Furthermore, this funding could rise to almost $20 billion in 2010. Our research also shows there are more than 366 firms currently operating in India and another 69 are planning to start their operations soon. In total, they seem to have amassed US $48 billion earmarked for investment in India during the next three and a half years, i.e., July 2007 - December 2010, and several firms we have spoken to mentioned they would be willing to invest even more if they saw good investment opportunities. Clearly, this is in stark contrast to 1996, when Indian companies only received US $20 million, and if indeed, Indian companies end up receiving US $20 billion in such funding then this would represent a thousand-fold increase between the fourteen years of 1996 and 2010. Of course, the future is difficult to predict because private equity investments are based on a complex combination of macroeconomic, microeconomic, and financial policy-related factors, which affect the rational and emotional sentiments of the investor community. Indeed, a slow-down in the growth of the Indian economy or a tightening of liquidity around the world are just two examples of changes that could lead to substantially lower PE investment in India than forecasted.

From a demand perspective, assuming an annual growth rate of 8%, annual inflation of 5%, and a constant exchange rate of 40 Indian Rupees to one US Dollar, our analysis shows that the Indian economy will grow in nominal terms from approximately US $1,030 billion during the calendar year 2007 to approximately $5,040 billion in 2020, and India can easily absorb US $60 billion during 2007-2010 and as much as US $490 billion during 2007-2020. However, for such investment to be valuable and wealth creating, it has to be broad-based and in diverse sectors and not limited only to Information Technology (IT), IT Enabled Services (ITES), or the healthcare sector. Interestingly, even though these sub-sectors seem to garner most of popular attention by many VC and PE firms, our analysis shows they are not the biggest contributors to the growth of the Indian economy, and there are several other sub-sectors, which we will highlight later in the article that might yield better returns. Finally, even though many VCPE firms have been focused on the IT and the ITES (IT Enabled Services, which includes the "Business Process Outsourcing" or the BPO sub-sector) sectors, a very important feature of the resurgence in the VC-PE activity in India since 2004 is that as a whole this community is no longer focusing only on these sectors.

Interestingly, even after incorporating our forecast of US $20 billion of PE investments in India in 2010, since the Indian economy is likely to be $1,490 billion during that year, this investment would represent approximately 1.35% of India's GDP and hence on a percentage basis, it would be still be less than the United States.


This is an excerpt from, "An Indispensable Guide to Equity Investment in India." To receive a copy of the full report, which includes much more information on the growth areas of India's economy and stock market, as well as opportunities, risks and best practices in Indian investment and M&A, visit the white paper section of the Evalueserve website.


Alok Aggarwal is Co-founder and Chairman of Evalueserve.