Here's news for you. Business process outsourcing is not the hottest sector as far as investments by venture capital and private equity firms are concerned.

Pharmaceuticals has emerged as the new hot favourite for investment.

In the last quarter (October-December 2003), venture capital and private equity firms announced investments of $304 million in 10 Indian companies.

Of the investments announced, eight companies raised rounds of $5 million or more.

TSJ Media, which tracks venture capital and mergers and acquisition activity, says that though the quantum of funds invested was significantly higher last quarter than that in the July-September quarter ($180 million), the amount was spread among a fewer number of firms.

According to TSJ Media three publicly-listed pharma firms announced 'blockbuster deals' and cornered as much as 76 per cent of the total investments made during the quarter.

The BPO sector, which had ruled as the favorite sector for the last several quarters, emerged second witnessing 4 deals worth $40.6 million. With funds chasing already public or late-stage companies, early-stage investments were a casualty.

"The willingness of private equity funds to look beyond the IT and BPO services sectors is now well entrenched. Encouraged by the boom in consumer spending, private equity funds are even venturing into sectors such as restaurant chains, cinema complexes, and retailing," said Arun Natarajan, Editor, TSJ Media.

The largest deal announced during the quarter was a $133.5 million investment by Newbridge Capital and Temasek Holdings (shared equally) in Hyderabad-based Matrix Laboratories, a maker of Active Pharmaceutical Ingredients and chemical intermediates.

The two funds are to pick up 13.9 per cent stake each in the publicly-listed Matrix. This is the biggest private equity investment till date in the Indian pharmaceuticals industry.

Matrix was followed by Aurobindo Pharma which raised $71 million from three private equity funds: CVC International (to acquire a 5.89 per cent stake), Merlion India Fund (5.53 per cent stake) and ChrysCapital (3.21 per cent stake).

Lupin, which raised $27.7 million by selling a 12.55 per cent stake to CVC International (a private equity arm of Citigroup), received the quarter's third largest investment.

BPO churn intensifies

The BPO sector continued to consolidate during the October-December quarter.

The View Group and eTech Ventures-funded Tracmail merged with two North America-based BPO firms: Toronto, Canada-based Webhelp and New Jersey, US-based Spherenomics. The combined entity, TWS Holdings, raised $6.5 million from existing stakeholders.

B2K Corp., a BPO company led by former bureaucrat Vivek Kulkarni, acquired the outsourcing services business of Talisma Corp., a Kirkland, Washington (USA) and Bangalore-based provider of CRM products and services, in which Oak Investment Partners holds a majority stake. B2K also raised a $4.1 million investment from Oak, UTI Venture Funds and Dhanalakshmi Bank.

Worldzen, which had raised $4 million from The Carlyle Group, announced that US-based IT consulting firm Keane had acquired a 60 per cent stake in the company and retained the right to increase its ownership over time.

The quarter also saw iSeva, which had raised $8 million from e4e, being acquired by US-based BPO firm ECE.

Increase in exits

Venture capital funds were able to exit from some of their non-BPO holdings during the October-December quarter.

"The recovery in the stock markets combined with the appetite for acquisitions among mid-sized IT firms, is presenting an opportunity for VCs to exit some of their investments," TSJ Media's Natarajan said.

The TV Today Network IPO, which opened in December, helped GE Capital and ICICI Venture sell part of their holdings.

The United Kingdom-based private equity fund CDC Capital Partners made a handsome profit by selling its 20 per cent stake in UTI Bank, a publicly-listed retail bank, to HSBC.

Goldman Sachs and Walden International funded IT services firm TechSpan merged with US-based Headstrong. ICICI Venture backed bio-tech firm Bangalore Genei was acquired by Sanmar Speciality Chemicals Ltd.

Infinity Venture funded Cognosys, a provider of software for the travel industry, was acquired by airline software maker Kale Consultants.

Component Insights India, a Bangalore-based software firm funded by Anthelion Capital and Magnus Capital, was acquired by Silicon Valley based enterprise software firm Interwoven.

The founders of multi-lingual content technology solutions provider Webdunia.com announced their buy back of the combined 40 per cent stake held by International Finance Corp. and Walden International.

US funds make a mark

While fund managers at blue chip Silicon Valley venture funds came on a group trip to 'check out' India during the quarter, some lesser known US funds voted with their cheque books -- in favor of BPO and IT companies with back-end operations in India.

Trident Capital and Winston LP invested $20 million in Kishore Mirchandani co-founded Outsource Partners International Inc. (formerly itAccounts), a BPO firm focused on finance and accounting services.

Trinity Ventures invested $10 million in Ephinay Corp., another finance and accounting BPO. Sierra Ventures and Updata Ventures participated in a $8 million round of funding for iCode, a maker of ERP software for SMEs.