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August 12, 2010

Creative strategies to desploy the PE dry powder

In an article published in Economic Times, Mayank Singhal, argues that PE firms in India have to come up with creative strategies to deploy the huge amounts of "dry powder" (uninvested capital) and counter the challenges posed by high entry valuations. He suggests 3 such - "ancillary strategy", "sector-driven approach" and "flexi-structure investment style") .
Consider the $30 billion in dry powder waiting to be deployed in India by global and local funds. Assuming an average equity cheque size of $25 million, this would imply 1,200 PE investments. Now compare this to the actual investment pace of close to 250 deals a year since 2004, considered by some to be the year when PE took off in India — it’ll take close to five years just to deploy currently committed capital, let alone huge incremental funding that is likely to pour into India from global LPs over the next 3-4 years.

...The ancillary strategy calls for a breakaway from the traditional approach of going after in-flavour sectors such as organised retail, microfinance or power generation. Premium assets in these sectors are highly-sought-after and often overvalued. Hence, any transaction is an auction process, and valuation discipline runs the risk of being compromised. A smarter strategy that PE shops could adopt — and some already have — is to go after businesses that are often overlooked but are equally likely to benefit from the overarching macro themes playing out in India.

...The acute shortage of electricity, resulting in exorbitantly high merchant rates and a 1-2 year payback period on power plants, has lured investors towards power-generation companies, making it an overheated space. However, there’s little interest in businesses that make smart power metres whose demand is likely to explode as power penetration improves across the country.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at