Mergers and acquisitions

Venture capital investments rise 48% to $2.1 billion in 2014

VC funds invested $2.1 billion across 1,108 deals, an increase of 47.7% from 2013 when VC funds invested $1.4 billion across 246 deals

Investments by venture capital (VC) funds rose sharply in 2014, both in terms of value and volume, as funds sought to invest in fast-growing e-commerce and online service firms.

The value of investments by VC funds was at a four-year high in 2014. VC funds typically invest small amounts in early-stage companies and are different from private equity funds which invest larger sums in relatively mature firms.

In 2014, VC funds invested $2.1 billion across 1,108 deals, an increase of 47.7% from 2013 when VC funds invested $1.4 billion across 246 deals, according to data compiled by VCCEdge, the financial research arm of VCCircle.com.

“Suddenly, there has been a surge in new businesses and applications which are becoming an integral part of our lives which is driving venture capital funds to invest in these companies,” said Jacob Mathew, co-founder and managing director at Mape Advisory Group, a mid-market investment bank, explaining the pick-up in deals from VC funds.

Home furnishing, travel bookings, car bookings and Internet of Things (IoT)-focused companies have managed to raise significant amount of capital, said Mathew.

The top VC investments this year included a $210 million investment by SoftBank Corp., Tiger Global Management Llc and others in ANI Technologies Pvt. Ltd, which runs online cab hiring service Olacabs. A $103.5 million investment by Tata Communications (Hong Kong) Ltd and others in Sentient Technolgies, which is developing technology to distribute artificial intelligence software, was the second largest deal of the year.

This was followed by Sequoia India and SoftBank’s combined $100 million investment in Indonesian marketplace PT Tokopedia.

While deal activity has picked up, the pace of exits for VC funds remains a concern just like for private equity funds, which have found it tough to exit existing investments due to a number of reasons—including weak equity markets in the last few years.

“In terms of total private equity and venture capital exits that have happened during 2014, in value terms, it has been lower but in terms of number of deals it has been higher. Now traditional PE firms like Temasek, TPG and others are also giving exit to VC’s,” said Sanjeev Krishan, partner and leader for private equity and transaction services, PricewaterhouseCoopers India Pvt. Ltd (PwC).

Fund managers and bankers add that exits via mergers and secondary markets have now started to pick up.

“In last two-three years, there have not been too many exits, but in some of the vintage investments, there will be exits in the form of capital market exits or mergers and acquisitions,” said Sunil Jain, founder of Sprout Capital Advisors, an investment bank.

On 22 May, fashion retailer Myntra.com, promoted by Mukesh Bansal, was sold to rival Flipkart India Pvt. Ltd for an undisclosed amount in a cash and stock deal. The deal was driven by common investors of Flipkart and Myntra, which include Tiger Global, Accel Partners and Sofina Capital, who ended up with more shares in the merged entity.

“Currently the valuations are high and those funds who would exit in next one or two years will be able to make good returns,” added Jain.
Mukul Singhal, principal at SAIF Partners, adds that in the past Indian VC funds had not seen too many billion dollar exits, funds remain bullish and are continuing to grow their portfolio.

“This year would be more focused towards new investments and growing the portfolio in hand to the next levels,” said Singhal.

In November 2014, SAIF Partners sold a 1.44% stake in Justdial Ltd through open market sale of shares. The fund was one of the early backers of Justdial in 2006, and it continues to hold 9.73% stake in the company. Its portfolio company Manpasand Beverages Ltd has applied to the capital markets regulator for an approval to launch its share sale programme.

Secondary market exits, particularly in technology and e-commerce firms, have also picked up, said Raja Lahiri, partner, Grant Thornton India Llp.

“There have been secondary exits and most of the investors who have invested in technology and e-commerce companies are sitting on humongous returns,” said Lahiri.

Secondary market sales are those an existing fund sells its stake to another investor. Apart from venture capital funds buying out each other’s stake, this year has witnessed entry of traditional private equity players investing in Indian start-ups and e-commerce ventures.

“VC’s fully appreciate the inherent risks in investing in start ups and early stage companies and appreciate that not every business model is going to work to plan. In some cases valuations have been very high and there is exhuberance in the valuations driven by more money chasing companies,” said Vikram Hosangady, head of transaction and restructuring at KPMG India.

“Most of the companies are now growing inorganically and most of the exits would happen through this route.”

The article appeared in Mint. The article can be found here.