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Venture Capital firms seek validation for Modi’s policies in UP election

BJP leader Uma Bharti at an election rally

Private equity and venture capital firms are largely bullish on India in the context of big economic reforms, but are awaiting the results of the ongoing Uttar Pradesh elections to assess the level of popular support that such policies enjoy, according to a survey by VCCircle.

VCCircle, which tracks private investment activity in India, said the first two months of this year saw 129 deals amounting to $ 665 million, with 39 exits amounting to $ 355 million. The number is on the lower side, as the first three months of 2016 had seen deals worth over $3.9 bln.

While investors are ‘cautiously optimistic’ about India — particularly the economic reforms unleashed by the Narendra Modi led government, they nevertheless want to see the level of popular support that such policies have, the survey found. The harmonization of all state- and local-level taxes in India, arguably the biggest economic reform measure in the last 25 years, is set to become a reality in July. Similarly, the government implemented a sudden switch in currency notes to flush out tax evaders.

A win in Uttar Pradesh is expected to bolster the government’s intent to go ahead with similar reforms, while a poor showing is likely to make it more cautious.

Not surprisingly, the survey found that the results of Uttar Pradesh elections are the most keenly awaited ‘domestic factor’ among investors, while the trade policies of the Donald Trump administration are the most keenly watched international factor.

“Our survey highlights that investors have adopted a wait and watch approach in 2017 and are ‘cautiously optimistic’,” said Nita Kapoor, CEO of News Corp VCCircle. She said an estimated $7 bln is “waiting on the sidelines” to be invested by India-focused investment funds.

“This is a figure which is at a 6 year high,” Kapoor said. However, she said, the ability of the government to continue to push through key economic reforms and geo-political developments would play a big part in seeing this investment fructify.

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Private equity players — who investment very large sums of money in largely mature companies — are keen on financial services, health and consumer sectors. On the other hand, venture capital firms — which invest smaller sums in fast-growing, early stage companies — were more focused on the firms that provide technology services to financial services and health care firms.

80% of venture capital firms said they were interested in investing in Indian companies that provide technology solutions to financial services companies in 2017, while 68% said they were open to investing in similar companies that provide technology solutions to health care companies. 32% of venture capital firms said they were on the look-out for good opportunities in digital media space.

The Indian media scene has seen a sea change in 2016 as traditional print companies reported disappointing financial results due to the rise of digital media and social networks. This has also been accompanied by the establishment of several new media outlets during the last few quarters.

Overall, private equity firms were more bullish on the prospects of 2017 compared to venture capital firms. 63% of the private equity investors who participated in the survey expect deal-making to gather pace in 2017, while 60% of the VCs shared the same opinion.

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