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Kerala: backwaters for private equity
Ravi menon, TNN Oct 23, 2011, 07.09PM IST
• VC Circle|PE|Kerala|investments
KOCHI: Private equity (PE) investment in Kerala is still a half-baked experiment in egalitarian investing. PE
investment commitments into the state dropped 62 per cent during the current calendar year to $63 million
from $116 million a year ago. The figures include investments in real estate.
From a mere five investments grossing $116 million last year, the number of PE deals dropped to four during
the period from January 1 to October 20, according to data from private equity and M&A-focussed research
firm VC Circle.
The fall in PE investments looks bad, but passes muster when one looks at the $1 million attracted in 2009 by
a single Kerala-based firm from an all-time high of $250 million grossed by eight companies in 2007.
The fall in Kerala's share of total PE investments into India cannot be more galling, particularly when the
total value of PE investments on a national basis has been on the rise every year. In the January-October 2011
period alone, $8.5 billion was invested in 317 deals across India, surpassing the $8.3 billion invested across
358 deals in entire 2010.
"PE firms find that too many companies in Kerala are closely held which makes valuation difficult. The
founders are also averse to diluting their stakeholdings to PE investors. As for the smaller companies, they
are able to tap debt from the Gulf," said Sriram Sekhar, chief executive officer of SMART Advisors, a boutique
capital raising and strategic financial advisory firm.
Financial advisory firms say that a number of issues on the infrastructural and labour artbitrage fronts
remain to be addressed. "Perceptions are everything," says Kapil Khandelwal, director, EquNev Capital.
"Unless the labour arbitrage and the way of collecting it improves, investors are likely to prefer locations
other than Kerala, viz., Chennai, Bangalore and Mumbai."
Khandelwal noted that while a number of product start-ups have sprouted at the technology hubs started by
the Kerala government over the last two decades, very few can really be capitalised. "Most are start-ups which
are barely three years old. And, how many of them can really survive the test of time and the markets they
operate in?" Khandelwal asks.
"Perception is reality," says Sekhar. "Besides, how are firms in Kerala differentiating themselves in most
sectors where they don't have much competition locally? PE funds typically look at investing in firms with
turnovers of Rs 100 crore plus, while VC (Venture Capital) firms expect investee firms to have a topline of at
least Rs 10 crore. There are very few players with that kind of growth," Sekhar says.
Khandelwal adds that the action on the PE front in Kerala will continue to be muted unless labour
perceptions change among outside investors. "There are still hardly any technology incubators in Kerala. How
will start-ups take off? Most of them are starting operations by raising debt," Khandelwal says.
Sekhar says that the pronounced slant in favour of raising term loans instead of diluting shareholder equity to
strategic investors speaks of a lack of maturity in Kerala's fundraising market. In Kerala, roping in a PE
partner is the last resort, as opposed to raising debt via bank term loans. In contrast, states like Tamil Nadu,
Karnataka and Andhra Pradesh have not been averse to bringing in outside investors on their boards by
ceding promoter shareholding.
Kerala: backwaters for private equity ‐ Times Of India
Monday, October 31, 2011
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