From the perspective of a private equity investor, India is a country that lacks access to deals, is encumbered by the absence of local debt, and is steeped in familial ownership, meaning there is little visibility for necessary due diligence. On top of that, India’s stock market is in the midst of a dramatic upswing, putting private equity in a second-fiddle position to an IPO. So why are so many firms rushing into the market?
“The interest in India for private equity firms is similar to the interest in China,” says Bain & Co.‘s Sri Rajan. “If you have a portfolio company in the manufacturing business, there is certainly a way to use China. Similarly, you have to look in your portfolio to see if there is a way to use India.”
Indeed, the same trends that saw China explode on the private equity scene the past couple years are impelling new groups into India.
Wilbur Ross, speaking to Buyouts in June, described that while similarities between China and India do exist, there are subtle differences. He said, “China got built on the arbitrage of blue-collar salaries there versus [the U.S.]. India will get built on the arbitrage of engineering salaries. There are a lot of people designing products there right now. And if you’re designing, you’re in a growing market, and it’s cheap, pretty soon companies will start making the products there.”
Some predictions peg India as the world’s third largest economy in 30 years, behind the U.S. and China. And the growth the country is currently seeing would confirm this estimate.
“Anything dealing with the consumer in India, from textiles to movie theaters to three and four star hotels, is just going at 50% a year,” said Ash Lilani, head of Silicon Valley Bank Global.
And for these reasons, private equity groups are moving in.
Too Much, Too Soon?
Even as the big firms are rushing in, there’s the question about whether there’s enough capacity for investors.
“It’s easier to raise $50 million [in India] than it is to raise $2 million right now,” Lilani says. “I think the challenge is, when will there be enough opportunities for people to invest in? All these guys need to write big checks.”
Those opportunities may be coming. Bain & Co. recently conducted a study that said India attracted $2.2 billion in investment capital last year, but that amount should, by a conservative estimate, triple by 2010. The study went through the last five years of $5 million-plus deals in India, which amounted to about 175 deals, said Rajan, who authored the report and leads the advisory’s private equity practice in India.
What stands out in the deal totals is the lack of traditional buyouts and the prevalence of growth stage deals. Growth capital and PIPEs represent about 70% of the top 25 deals. The only sizeable control-stake buyout to date is the purchase of General Electric’s business processing operations (BPO) by
Growth stage by necessity has been the entree for traditional buyout firms in India. One of the bellwether investments was
Major challenges still remain for India, which partly explains why the country lags its Asian peers in terms of activity. India currently accounts for roughly 10% of PE capital dedicated to Asia, and, according to Bain, private equity activity only makes up 0.2% of India’s GDP. (For contrast, in North America private equity represents 0.6% of its GDP.)
Preeminent among India’s problems is deal sourcing. At the top of India’s economy, massive corporations are controlled by a few huge families, which own arrays of diversified assets, and family ownership continues through all tiers of the economy. This partly explains the interest of the buyout shops in doing growth stage deals—it’s a way to build a brand name.
The second major issue, as in China, is diligence. “In India, more work has to be done to make sure the company you are buying is the company you think it is,” said Rajan.
Avnish Bajaj, a founding managing director of
Bajaj added that other complications for buyouts include the expense of enforcing contracts and regulations around asset reconstruction.
Meanwhile, with so many firms operating in India’s nascent market and so few opportunities presenting themselves, good deals can be tough find. The booming market for IPOs has only intensified this struggle. Because of this, multiples have been pushed way up over the last few years. The purchase price multiple for a BPO business rose from 25.9x in 2001 to 30x in 2004, according to the Bain study. For pharmaceutical companies, it rose from 25.4x to 53.8x during the same stretch.
The Case For PE
Despite the market’s growth, the business culture in India, as with any emerging market, can be still be described as disorganized. However, as the Indian business community hunts for ways to elevate their businesses to global standards, companies can be expected to tap private equity know how.
“One of the value propositions [of multinational buyout firms] is that you have the knowledge about best practices and a global network of expert advisors. It’s not just about the money,” said Rajan. “There’s a huge interest in India right now to bring capability to global levels, and there’s interest in talking to people who can do that.”
Bajaj’s Matrix Partners colleague Rishi Navani, anticipates that the buyout market will take a full five years to emerge in force, and in the interim will continue to encounter major obstacles. But with 700 million people under the age of 35, high GDP growth and key sectors growing 20% to 40% per year, Navani, like many others, believes the prospects are bright.