By Tony Munroe and M.C. Govardhana Rangan, Reuters
Mumbai: Private equity investment in India is poised to surge, but for now buyout funds will have to be content with mostly smaller deals or minority stakes in larger firms.
The reluctance of company founders to sell, the time and effort required to complete a private equity deal in India, and the attraction — at least until recently — of a booming stock market means global buyout firms that have set up shop in the country have struck relatively few big transactions.
“Private equity is becoming more and more accepted, but still not in the large deals,” said Raj Kataria, managing director at DSP Merrill Lynch, which represented US giant Kohlberg, Kravis & Roberts in its $900 million (Rs3,990 crore) purchase last year of the Indian software unit of Flextronics International Ltd.
In general, he said, buyouts in India are easier in the $100 million to $500 million size range, with significant volumes of larger takeovers still two or three years away.
If it continues, the current stock market correction should bolster the relative attractiveness of private equity buyers.
India’s main stock index rose almost 47% in 2006. It hit a record on 9 February, before falling nearly 16% in less than a month to a five-month closing low on Monday.
“With IPO markets losing some sheen, private equity would become the choice for founders seeking funds,” said K.E.C. Raja Kumar, chief executive of UTI Venture Funds Management Co., a Bangalore-based fund.
“Last year we had to skip many deals due to high valuations,” he added.
Private equity investment has driven the global M&A boom. Deals in India by so-called financial sponsors more than tripled last year, albeit to a relatively modest $7.46 billion, according to Venture Intelligence.
“Compared with other Asian countries, India has so far been a nascent buyout market for private equity, although we expect that to change,” said Rajeev Gupta, managing director and head of buyout in India for US heavyweight Carlyle Group.
“The growing receptivity of Indian companies towards domestic and international M&As, combined with their increased understanding of private equity, brings us opportunities.”
India’s 9% economic growth and a robust corporate sector have led global buyout houses such as Carlyle, General Atlantic and Blackstone to open offices in India, but big buyouts have been rare.
“India was not ready for sponsors because of the nature of entrepeneurship, whereby family-controlled businesses regarded their creations as being something to pass onto the next generation,” said Frank Hancock, head of M&A and equity capital markets for India at ABN AMRO in Delhi.
More typical have been deals for minority stakes, such as the one struck in January by Blackstone, which paid $275 million for an undisclosed holding in media company Ushodaya Enterprises Ltd.
In a smaller deal, Carlyle boosted its holding in back-office firm Allsec Technologies Ltd to 27.65%, taking its total investment to $25.4 million.
Part of what has slowed the rise of private equity is the time it takes to complete a transaction — six or eight months at minimum, according to DSP Merrill’s Kataria.
“It takes a very long time to do a private equity deal. It takes a lot of time to negotiate the agreements and the rights.”
Another factor slowing the growth of sponsored deals during India’s three-year market rally: Private equity buyers tend to be more disciplined in bidding for assets than industry buyers.
Last month, for example, high valuations in the battle for cellular carrier Hutchison Essar Ltd., which British operator Vodafone Group Plc eventually won for $11.1 billion, scared off private equity interest, sources have said.
The biggest deterrent to the rise of buyouts, however, has been the unwillingness of entrepreneurs who play a dominant role in corporate India to cede control.
“All that is changing as India opens up to the world and the next generation of entrepeneurs returns home with MBAs from the US or Europe,” ABN AMRO’s Hancock said. “As a result, we see sponsors becoming a major theme for the next two or three years.”
Renuka Ramnath, chief executive of ICICI Venture Funds, the country’s largest private equity firm with $2 billion under management, agreed that opportunities will arise as second and third generations assume control of family companies.
Some of India’s biggest family conglomerates, including the Tata Group and the Aditya Birla Group, have made multi-billion dollar buys overseas to strengthen their core businesses, which may trigger some divestment of peripheral holdings.
“The likes of Tatas and Birlas have been talking of core and non-core businesses for about five years. The recent developments may lead to them giving shape to those thoughts,” Ramnath said.