2009 proved to be a tough year for SMEs in India as they not only had to witness sharp erosion in their margins, but also found it difficult to access adequate equity capital support from investors. Private equity (PE) investments into the SME sector plunged sharply by 68% to US$580 million in 2009, thereby making it difficult for small firms to secure financial support for implementing their growth plans. Declining trend in PE investments set to reverse The number of PE deals struck by SMEs in 2009 stand at 81, as compared to 187 in 2008, reflecting a sharp fall of around 56% in equity investments into the sector. Drop in PE investments has largely been attributed to the global economic slowdown. According to the data compiled by Venture Intelligence, PE investments worth US$1,454 million were made into the SME sector in 2007. â€The global financial meltdown made PE investors jittery of investing in small businesses as there is a great deal of risk associated in funding these cash-starved companies. Fear of getting poor return on investments (RoIs) amid challenging times compelled fund managers to steer clear of putting too much money into the sector,†said A Jajoo, a retail investor and director of a Mumbai-based financial advisory firm, Tax Consultants. However, analysts believe that the drop in PE investments into the SME sector is merely a temporary phenomenon and the sector will attract greater equity capital in 2010 on back of the resurgence in growth witnessed in some key economy-driving sectors. â€Strong GDP growth figures and pick-up by SMEs in key sectors will encourage investors to put their money back into the economically significant small businesses. Rise in PE funding will also enable small units to strengthen their equity capital base and implement their capacity expansion plans,†said Nikunj Laddha, an independent chartered accountant in Kolkata. Sectors such as infrastructure, education, SME, healthcare and food and beverages, among others are reviving rapidly, thereby prompting equity fund managers to explore investment opportunities in these segments.
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