Sometime back I was going through an article in BusinessToday which focused on the year 2012 and what investors can expect out of India. It clearly stated many challenges that India will face as a hangover from 2011 and 2010, but it also stated that ‘foreign institutional investor inflows have a huge influence on our markets. For instance, in 2007, FIIs pumped in $16 billion and the market rose 44%. This was followed by a 45% drop in 2008 when FIIs took out $12 billion. In 2009, the Sensex rose 85% amid FII inflows of $19 billion. It rose 25% in 2010 when FIIs invested $30 billion.’ So the big question here is whether the foreign investors will return in 2012?

Another is, can the domestic investor make up for it?

The Indian market is nascent and immature, when compared to the developed market. But the outlook will change in the coming year when the full potential of Private Equity industry will be accomplished by embarking on a restricting of bond market and leveraged buyout transactions (LBO), which is still in a very nascent stage in India.

When you compare the domestic investor with the global investor, there are a lot of constraints the former faces. The factor driving behind the domestic fund is the difficulty in return of capital as redemptions are done only through profits and buyback of shares by a company is restricted to a maximum of 25% of its paid up capital. Winding up domestic fund is exceedingly time consuming and cumbersome. And Debt Market is too high compared to the US & European market.

The bulk of new capital is available from Global investors, which made more investment flow using various fund raising strategies like LBO, Bond Market

structuring and Private Placements.

Positively, if there is a dip in investor interest from the Global Player, it will only remain for a short term. There is a huge surge in Indian fund houses to setup modules in Mauritius and Singapore to attract global investors and working with fund raising strategies like credit swap and overseas listing.

I believe the global investors will definitely find India more attractive if the policies are tweaked and inflation has a formal support; there are improvised systems in place for food item and raw material supply for the industry. But for now, yes, the domestic investor needs to look up to see the global investor.

2012: The Game Changing year

The author is Mr Srini Chakwal Managing Director Redclays Capital. The views expressed are his own ,any replication of this content is an offence.

Being an investor for the last few years, I have had the tendency to acknowledge the profoundness of author Robert Wibbelsman’s quote on investing. He had said, “The problem with the person who thinks he's a long-term investor and impervious to short-term gyrations is that the emotion of fear and pain will eventually make him sell badly.”

It echoes a classic scenario of investing in times like the last couple of years when the richest nations had to rely and even break their piggy banks to check if there were pennies left! We have seen a lot of fear and pain in the investor fraternity since the recession struck, but I feel that in an Indian context the future for private equity and venture capital investment activities will witness a significant increase.

‘Private equity and venture capital investments in India rose 41% in 2011 over the previous year - the highest since 2007. Last year saw 427 PE/VC deals worth $11.2 billion (around Rs.59,500 crore today), compared with 328 investments worth $7.96 billion in 2010’, according to data from research and financial consulting firm Four-S Services Pvt. Ltd.

So, specifically for 2012, the scenario is promising and I think the main factors which will accelerate investment will be the huge capital demand for infrastructure and energy sector. The global financial credit crisis has not majorly affected the Indian Investment horizon and thus I see India continuing to remain a long-term investment market/destination.

The Outlook for 2012 is also bright because the Global agency Moody's upgraded the credit rating of Indian government's bonds from speculative to investment grade; a move that could encourage FIIs to increase their exposure in gilts and help companies raise funds from abroad at competitive rates. Also adding to the optimism is that the agency has upgraded the long-term country ceiling on the foreign currency bank deposits from Ba1 to Baa3.

But a word of caution.

The year will be demanding. This is largely because I also believe in the strong notion in the investor sorority that the private equity segment is in a phase where it has to choose the right path and by the end of 2012, we will get to know who chose the right path. The year could definitely be a game changer.

This is mainly because there are several challenges. It continues in the form of the state of the stock markets and a consequent inability to exit through IPOs at a time when exits through mergers and acquisitions are also rare to come by. Also there have been a series of actions by regulators in the form of redefining tax laws governing investment from overseas jurisdictions, restrictions on convertible instruments for FDI and how they will be treated from a regulatory perspective and draft regulations, which seek to control PE operations in the country.

In all its diversity, India is complex and so it is for private equity. Competition is tough and in the PE business it is not matching the toughness of the competition that will work, it is acumen…and that will make all the difference.

Definitely an Investment Destination

Author Srini Chakwal Managing Director Redclays Capital Pvt Ltd. The views expressed are his own , any replication of content is an offense. For feedback on the same write to srini@redclays.com

More often than not, I am asked whether India has turned into a growth capital destination or whether the country will be able to consistently achieve big deal sizes. These queries have been rampant especially during December 2011.

It is true that the median deal size has been around $11 million in 2011, but given the current global market scenario, I would securely bet that India will continue to be seen as an investment destination, dominated by growth capital…and the deals in growth capital will be predominantly in the Infrastructure sector. Energy, consumer products and Healthcare sector are also significant growth sectors.

Despite the ongoing economic turmoil, PE investment to India for the long-term prospects will be phenomenal, due to unique and vast entrepreneurial spirit and huge domestic consumption.

While it is true that for two continuous years (2010 and 2011), the value of investments were very similar and not very high, I believe the trend will change in terms of good value proposition in private equity investments from a long-term perspective. During 2010 & 2011, we have seen stagnation in growth due to disproportion in supply and demand which created inflation. Rising interest rates and increased pressure on corporate earning and overpriced valuation as well as exit strategies were relatively low for PE Investments in the secondary market.

This was also the reason that we saw a dip in investments during the second half of 2011. Secondary market weakness, uncertain policies towards investment in foreign retail and increasing commercial uncertainty were major hitches for private Equity firm to exit. This was a temporary setback for fund raising and investor uncertainties that slowed deal volumes.

But the global financial credit crisis has not majorly affected the Indian Investment horizon, and I thus see how India will always remain a long-term investment market/destination.

I feel the year 2012 will see a significant increase in PE/VC investment activities, with India’s strong growth story, vibrant entrepreneurs and wide range of sectoral opportunities. India will remain a favorite investment destination for another decade to count.

As for the size of deals that I expect to hit in 2012, it will significantly improve from the Second quarter of 2012 in terms of number deals and size volume. As I mentioned earlier, the major investment activities we can expect to see will be in infrastructure and Energy sector. In terms of deal volume, I think clean tech, mobile technologies and cloud computing will have an advantage especially for start up and early stage companies. I also think that we can see investor appetite for long term vision on Renewable Energy and Social ventures.

Mail your thoughts to Srini@redclays.com