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Private Equity investment in SMEs dipped by 68% at US$ 580 million in calendar 2009: ASSOCHAM

April 22, 2010: Private Equity investment in SMEs took a sharp dip by almost 68% and stagnate at US$ 580 million in calendar 2009 and thus made it difficult for small firms to seek safe financial support for executing their growth plans, reveals a Paper on Private Equity on Small and Medium Enterprises (SMEs).

The total number of PE deals signed by SMEs in 2009 stood at 81, while in 2008, it was 187, highlighting a sharp decline. The fall in PE investments have largely been credit to slowdown, says Assocham Paper.

The Paper further highlights that 2009 was a hard-hitting year for SMEs in India as they not only had to face losses, but also encountered difficulties in accessing adequate equity capital from investors.

The meltdown made PE investors wary of investing in small businesses as there is a great deal of risk involved when it comes to funding cash-strapped companies. Poor returns on investments in the midst of challenging times have forced fund managers to think twice when it comes to putting too much into the sector, added Mr. Rawat.

Overall, PE deals in India during 2009 numbered 287 amounting to $4.43 billion as against 502 amounting to $ 11.9 billion in 2008. The total value and volume of PE deals reduced by 50% and 40% respectively as compared to 2008.

In the year 2009, 650 Private Equity and M&A deals with a total announced value of $ 26.98 billion compared to 948 deals worth $52.33 billion in the year 2008 and 858 deals.

Some of private equity investments during January 2008 to December 2009 has been shown in tabulated form :

The SMEs have been witnessing winds of change in the new sources of capital- in the form of private equity (PE) and foreign direct investments (FDI). In Jan 2008, The Soros Economic Development Fund (SEDF), Omidyar Network and announced a Small to Medium Enterprise Investment Company with an initial corpus of $17 million for providing capital to SMEs in underserved markets.

Mauritius-based Frontline Strategy launched a $200 million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies, primarily in the industrial space with revenues between Rs 200 1,000 million. In 2007, Mauritius-based Horizon advisors launched Ambit Pragma Fund I, an India dedicated PE fund, with a corpus of $100 million for providing equity capital and professional management advice to SMEs.

Investments in the SME sector are not only by PE funds but this sector is also attracting FDI. In this respect the government has removed the 24 per cent cap on FDI in the SME sector. Foreign entities are also keen on promoting traded and cooperation between SMEs of different countries. Genesis Initiative, an UK-based organisation consisting of entrepreneurs, policy makers and SMEs, is trying to forge mutual cooperation between SMEs in India and UK for in terms of JVs and partnerships in sectors such as textiles, IT, infrastructure etc.

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