The over USD 6-billion e-Commerce market in India will see IPOs gaining traction, preferably in the US, as well as see several consolidation moves in the next 2-3 years, experts said.
Private Equity (PE) and Venture Capital (VC) funds turned towards the Indian market around 2008-09 after the sub-prime crisis hit the US and the debt problems in Europe. These funds started investing in the nascent online shopping market, where they expected huge returns in the medium-to-long term, they added.
The PE and VC funds usually have investment commitments in the range of 6-10 years, after which they have to return the amount with assured benefits to their Limited Partners (LPs). The funding varies on company-specific circumstances as well as market conditions.
Considering the investment cycle in India, these funds could look for a closure in 2016-18, experts said. However, the investment scene is certainly not drying up as the e-Commerce market is attracting huge attention from investors globally and there will be more funds and companies coming into the country to invest in this space, they noted.
"When investors put in money, they also have a commitment that is generally around 7-8 years after which they have to return it to their LPs.
Considering many funds invested around 2010, we will see either these e-Commerce firms going for IPOs or we will see consolidations to shore up value," Aristotle Consultancy Director Deepak Dhamija told PTI.
Aristotle provides financial and legal solutions to e-Commerce firms such as Jabong, GoJavas, FoodPanda India, FabFurnish, Printvenue and the like. Dhamija added that funds look at a 6-10 year window, but generally VC funds consider 7-8 years as the average age for RoI (Return on Investments).
An investment banker who did not wish to be named said these funds now are also selling or in the process of selling some of their stake to other funds.
"The e-Commerce market is booming for VC and PE funds. So, to keep the value of their investments high, many funds will look for IPOs or consolidations, going ahead. But many would wish to stay and will sell some stake to maintain their RoIs as well wait for valuations to go up," he added.
Without giving a timeframe on exits, KPMG India Accounting Advisory Services (Partner and Head) Sai Venkateshwaran said: "We could potentially see exits for these PEs happening through a number of routes -- IPOs, sale to strategic investors, other PEs, etc."
India Venture Capitalist Association President Arvind Mathur said: "It is not as if only the current funds will be there in the next few years and then taper off. New funds will most likely enter the market, given the strong potential for e-Commerce in India and its demographic profile and vast rural areas where further penetration will occur in coming years."
Mathur said there are other options like M&A deals leading to high-quality, value-added exits. On the funding scenario, he expects more funds to enter the Indian e-Commerce market, given the positive outlook for India in the foreseeable future.
"Let's not forget that there is a very strong engineering talent base in India and we will see a lot more innovative solutions and products coming into the market... Also, the new government is focusing on lowering barriers for ease of business.
All this augurs well for the e-Commerce sector as well as other industries in India," he added. However, investors will look to diversify among existing and promising new players as well, Mathur said. KPMG's Venkateshwaran feels that with evolution of e-Commerce ecosystem, there have been numerous investments in recent months in this space across various start-ups as well as more established players.
"As this space evolves and grows in coming years, there will be more value creation through both consolidation as well as back-end and front-end integration, for instance, payment platforms or supply chain and logistics management, etc," he added. Start-ups with good ideas and business models will continue to attracts investments, Venkateshwaran said.
He tied the possibility of exit through IPOs to many factors, including the market conditions at that point in time. The choice of market for an IPO would also depend on the existence of a favourable regulatory environment as well as a suitable investor base, Venkateshwaran pointed out.
"This sector has generally viewed the US markets as more suitable, considering the depth of those capital markets and also because investors in those markets are perceived to understand this sector better.
The US has also tried to make its markets more attractive for emerging growth companies by relaxing the regulatory and compliance requirements," he opined.
Aristotle's Dhamija feels that despite the future growth projection of the e-Commerce sector, the firms in this space have so far not been able to produce profits or have given an indication of the timeframe of benefits to start pouring in. "We are talking only of discounts.
There is no sound profit generating model. So, firms are burning cash fast. This does not mean that the sector is going down, but the investors will in some time look at the RoI dimension and start pressurising the firms for results," he added.
Major funds that have invested heavily in e-Commerce firms in India are Tiger Global, DST Global, Kinnevik, Naspers, Steadview Capital, Accel Partners and the like. According various analyst estimates, VC and PE funds have invested over USD 5 billion in the online retail sector since 2011.