Mumbai: Describing India as an "unusual mixture of high promise and real uncertainty" for private equity (PE) funds, consultancy firm McKinsey Wednesday said there was a 44 percent cumulative jump in deal values at USD 7.6 billion in 2011.
The increase was driven largely by smaller deals and even after a healthy jump, the cumulative deal value continues to be merely 50 percent of the USD 14.7 billion witnessed during the peak of activity in 2007.
The report said the average deal size plummeted to USD 30 million in 2011 from USD 50 million in the previous year, while the deals under USD 10-million increased fourfold.
"Large investments are now increasingly rare in the country," the report said, attributing it to higher expectations on valuations by local companies.
A majority of the deals were on the company expansion front, it said, noting that there was a three-fold increase in such deals over the previous year, which now account for 72 percent of total activity.
Stating that foreign funds are sitting on cash pile of over USD 20 billion, the firm noted headwinds like uncertainties in the regulatory environment and increased local competition.
"Those seeking to meet the new demand for capital must also contend with regulatory changes. Newly adopted provisions have been decidedly mixed for the PE industry, while further proposals could pose even greater threat, particularly for foreign players."
The PE industry, which typically invests in the country through tax havens like Mauritius, has been alarmed due to the proposed General Anti-Avoidance Rules (Gaar).
Given the high competition from local players, the report asked funds to adopt a lean operating model.
On the question of exits, which determines the success of an investment, McKinsey noted with caution that they decreased by 43 percent in 2011 on a higher base.
First Published: Thursday, July 19, 2012, 00:46