As the new year’s deal making season gets under way, billion dollar-plus deals occupy top mind share, specifically because of the manner in which 2007 ended. The last week of the year past ended with a bang—Temasek Holdings Pte Ltd, Investment Corp. of Dubai (ICD), Goldman Sachs Group Inc. and a bunch of other investors announced a $1 billion (Rs3,930 crore) deal to buy a reported 10% stake in Bharti Infratel Ltd, the wholly owned telecom tower subsidiary of Bharti Airtel Ltd. More interesting than the size of the deal is the fact that two out of the seven investors are sovereign wealth funds.
The Bharti Infratel deal, in which Temasek is the largest investor (according to newspaper reports), is the second largest private equity deal announced in India last year. The largest, incidentally, involves Bharti Airtel and Temasek. In March, the Singapore-headquartered Temasek announced that it would pick up a 4.99% stake in Bharti Airtel for $1.9 billion. Both signal that blockbuster deals, well above the $1 billion ticket size, have begun to find expression in India. More significantly, the presence of Temasek and ICD in both deals signals that sovereign funds are going to be formidable competitors to traditional private equity investors in an already crowded market.
Sovereign funds are very different animals compared with a Blackstone Group Lp or a Warburg Pincus Llc. or an ICICI Venture Funds Management Co. To begin with, their compulsions for investing are different. While the final objective is obviously above average returns, their investment decisions are often led by macro economic considerations back home. When Temasek set up office in India in 2003, it was a well-deliberated move by the Singapore government, which owns Temasek, to seek growth outside the country as Temasek’s domestic investments struggled to deliver returns.
Over the years, the firm has steadily pared Singapore-based private equity holdings. These stood at 38% out of an overall portfolio worth S$164 billion as on 31 March 2007. South Asia, which includes India and Pakistan, accounted for 4% but this would be significantly higher now after the two Bharti deals.
The second important factor to note about sovereign funds is their source of capital. Since such funds invest from their respective government’s balance sheets, their ability to absorb risk is that much higher. While Temasek set the ball rolling as the earliest sovereign fund to enter this market, similar entities from West Asia will be the ones to watch in coming years. Along with ICD, other funds from the region that have made a quiet entry in the past year or so include Abu Dhabi Investment Co., the world’s largest sovereign wealth fund with assets estimated at more than $500 billion, and Kuwait Investment Authority.
The growing presence of such funds here does mean more competition but the big beneficiary would be the market itself. Sectors that are likely to benefit the most include financial services, telecom and technology, notes a Knowledge@Wharton article on Why India Should Welcome—But Watch—Sovereign Wealth Funds by Vinay B. Nair. (Read more on the subject at http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4234.) Meanwhile, we wait for the world’s most high-profile sovereign fund today—China Investment Co. —to make an overture to this market.
Snigdha Sengupta is Mint’s resident expert on private equity and venture capital.
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