In recent years, the world’s largest private equity firms have rushed to India. Their big idea: invest lots of money to tap into one of the world’s fastest-growing economies.
So far, it’s not working out that way. Even though billions of dollars have been raised for investing in India, hardly any big deals are being done. The few that have happened are much less sophisticated and lucrative than the deals that the private equity business is renowned for worldwide.
Rather than full-blown buyouts—where private equity firms purchase publicly listed companies, take them private, restructure them and sell them two or three years later for a fat profit—big private equity deals in India so far have involved the purchase of small, passive stakes in companies. That’s a strategy more common among plain-vanilla mutual funds.
Take Carlyle Group’s $650 million purchase last month of just 5.6% of HDFC Bank Ltd. The US firm wasn’t even the first major foreign stakeholder: Citigroup Inc. already owned a bigger stake. Despite its relatively small size, that deal was the second-biggest private equity transaction in India: Last year, Kohlberg Kravis Roberts & Co. bought an 85% stake in Flextronics Software Systems Ltd for $900 million.
Carlyle’s purchase may turn out to be lucrative for its investors because HDFC’s stock price has been rising. But it also highlights the fact that opportunities for private equity to follow its classic playbook have proved elusive.
So far this year, just 5.1% of the $3.49 billion spent by private equity firms in India has gone to buyouts, according to the Centre for Asia Private Equity Research in Hong Kong. The rest has gone to purchases of stakes in public firms and on seed capital for smaller firms and other forms of financing.
There are a host of reasons for that. Among the biggest: Many of India’s largest public firms remain family control-led, and many are reluctant to sell what they consider the family’s crown jewels.
“Families are very aware of the growth opportunity they have. No one at this stage is willing to sell,” says Ajay Relan, an India-based partner at CVC International, Citigroup’s private equity arm.
He says buyouts will remain hard to come by, unless conglomerates choose to spin off non-core operations. Even then, the Indian stock market’s meteoric rise in the past two years has driven up prices that firms would need to pay.
Nor has India yet seen the kind of major upheaval that has created buyout opportunities elsewhere in Asia in the past. South Korea, for instance, realized it had a massive bad-debt problem in 1998, and within a year, Newbridge Capital, now part of TPG (formerly Texas Pacific Group), had bought Korea First Bank.
India’s robust stock markets represent another hurdle. Companies are accustomed to raising money on domestic stock exchanges. The Mumbai exchange’s benchmark index has doubled in the past two years, so it’s relatively easy for local firms to raise funds by issuing stock—without losing control of the company or having to adapt their business practices to suit private equity.
The result is that “there aren’t that many large transactions in India—period,” said Ravi Adusumalli, head of India operations at SAIF Partners, a Hong Kong-based private equity firm managing more than $2 billion in Asia.
The gold standard for private equity in India dates back to 1999, when a US buyout fund paid $290 million for just under 19% of mobile-phone carrier Bharti Tele-Ventures. Like more recent investments in the country, the deal didn’t give Warburg control over Bharti’s business. Instead, Bharti’s growth has allowed Warburg to realize a profit of more than four times as it has sold slices of the stake in the past few years.
Private equity firms say they are established here for the long haul, and that, until buyout opportunities pick up, they are content to invest in fast-growing firms, which are legion here as the economy grows at an annual rate of around 9%. And India still represents a more promising pro-spect than China, where regulators have resisted buyouts of former state-owned firms.
“Given the large size of the Indian economy, the quality of firms and their high growth potential, private equity firms will have plenty of opportunities,” says Rajeev Gupta, Carlyle’s partner in India.
Anil Ahuja, co-head of Asia for British venture capital firm 3i Group Plc., says spending $25-400 million on stakes in large firms across a wide variety of industries is a good way to tap India’s growth. “We’re talking about very small stakes in very large companies,” he says. The venture firm expects one such investment, Indian media and entertainment company Nimbus Communications, to list later this year.
But small deals, even in large numbers, may not be enough to soak up the private-equity money that is being targeted at India. The private equity business has raised $488 million in the first four months of this year from sources inside and outside India for investing in India. Last year, $3.187 billion was raised, up from $691 million two years before, according to the Centre for Asia Private Equity Research.
Blackstone Group alone said two years ago it would spend at least $1 billion on investments in India. So far, it has spent just a third of that sum.
Cross-border mergers and acquisitions is one area where firms may find an avenue for deals. Relan says Indian corporations are seeking financing and expertise that will let them buy assets overseas. CVC International recently provided capital to fund an $80 million acquisition by Indian textile company Spentex Industries Ltd of manufacturing assets in Uzbekistan. Relan’s hope is that bigger opportunities will follow.
In the meantime, taking stakes in Indian public companies remains the favoured way to spend money. ICICI Holdings, another big Indian financial firm, has hired JPMorgan Chase & Co. to advise on the potential sale of a stake, according to a person familiar with the matter. The bank wa-nts to offload a small stake in its life insurance and asset ma-nagement business, these people say, and General Atlantic and other private equity firms are possible contenders to invest. A spokesman at the parent company, ICICI Bank Ltd, declined to comment, as did an official at General Atlantic.