It's bad news for the private equity (PE) space in India and China. A detailed survey has found that these two countries are likely to suffer a decline in deal activity over the next 12 months even as a global slowdown has a telling effect on the global PE industry.
According to the 2012 Global Private Equity Report, released by consulting firm Grant Thornton, private equity firms around the world are bracing for tough conditions for both fundraising and deal-making. Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe.
The report provides an insight into private equity general partners' (GP) expectations for numerous aspects of the fundraising and investment cycle.
According to the survey, many private equity executives expect both China and India to suffer a decline in deal activity in the next year. This represents a dramatic turnaround in sentiment for both countries. In 2011, 78 percent of respondents expected investment activity in India to increase, with the remaining 22 percent expecting it to remain steady. This year, 45 percent expect it to decline.
The survey, interestingly, sees Indian and Chinese PEs looking at opportunities outside their home countries to try and make up for the dry patch domestically.
China and India are two of the largest global economies and they continue to experience growth above and beyond that of the Western economies.
As such, internal demand is still a big driver and focus of domestic GP attention. Given the significance and success of these countries it may be surprising to note that even GPs based in these countries consider international opportunities, the survey notes.
China-based GPs, if they are not entirely focused on their domestic market, have a particular eye on South East Asia. Indonesia tends to be the key focus of Chinese GP attention in the region. However, some Chinese GPs also highlight markets as diverse as India, Africa, South America and Europe as potentially being of interest from a private equity stand point, says the survey.
The trend is similar for Indian GPs. While South East Asia is also regarded as a key area of private equity opportunity, Indian GPs are likely to identify a geographically diverse set of opportunities, including some Western markets, Russia and Australia.
Says Harish HV, Partner, Corporate Finance, Grant Thornton in India: "Private equity in emerging markets is challenging because of the governance risks and the absence of deep capital and M&A markets to enable exits. An understanding of the local situation is key to success in these markets."
This year's report also sees a marked decline in fundraising expectations of GPs around the world, with nearly three-quarters (72 percent) describing the fundraising outlook as either "negative" or "very negative". In 2011, the figure was just 46 percent, the survey showed.
The most dramatic decline in optimism from 2011 is evident in the BRICS: Brazil, Russia, India, China and South Africa. This year, 78 percent of respondents in these markets described the fundraising outlook as "negative" or "very negative". In 2011, the figure was 39 percent.
Commenting on the fund raising scenario, Harish HV said that India has fallen from its high pedestal of being one of the markets where fund raising was considered easy. This is the result of the experience that PE funds have had in India and also the 'policy paralysis' made by the Indian Government. The fund raising figures show a high percentage of negativity since the survey was conducted between June and September where some of the new reform measures were not announced.