The $650 million investment by global buyout firm Carlyle Group in HDFC is perhaps a sign that India is getting closer to the era of large private equity deals. This deal comes almost a year after Kohlberg, Kravis Roberts & Company (KKR), another private equity giant, pumped $900 million into Flextronics Software Systems. The overall numbers, too, are impressive. Venture Intelligence, a research outfit, says that Indian companies raised more capital in 2006 from private equity and venture capital investors than they did from initial public offers.
But these facts are also a bit deceptive. While India is clearly the fastest-growing private equity destination in Asia, the size of individual deals is still too small to make them qualify as proper private equity investments. Usually, the new kings of global capitalism put billions of dollars on the table to buy large stakes in companies, often buying the whole company and taking it private. In the world of private equity, big is beautiful—be it deals or egos.
The situation in India is different, despite a couple of recent deals of more than half a billion dollars. Consulting firm Bain & Company analysed the nearly $15 billion worth of deals done by private equity investors in India between 2000 and 2006. The average deal was for $21 million, which is almost like loose change in this line of business.
For confirmation, take a look at the latest headline-grabbing global private equity deal: the $7.4 billion paid by Cerebus Capital Management for 80% of Chrysler. A few recent global deals have topped the $30 billion mark. Buying even half of one of India’s top-notch listed firms would mean writing a cheque for $10 billion or so. Compared with this, even the largest deals done in India in recent months seem unimpressive in terms of their size.
Why has India not yet seen any multi-billion dollar private equity deal? There are two explanations—high valuations and an obsession with corporate control.
First, corporate valuations in India are high and it is very difficult to find opportunities for large deals that can make good money for investors. The most profitable Indian private equity deal was the one between Bharti Enterprises and Warburg Pincus. The deal was struck in 2003, when the Bharti stock was languishing in a stagnant market. Today, in a bull market that has stretched valuations of companies, it is very difficult to find a large diamonds-in-the-dust deal of this sort. Nor are there any potential turnaround or restructuring cases in the top echelons of the Indian corporate world, not in this era of booming profits. That’s one reason why bulge-bracket private equity firms such as Carlyle and Blackstone have taken so much time to do deals in India.
The second reason why big buck deals are still rare is that Indian companies today have little trouble accessing capital from public markets. They would rather raise money from retail and institutional investors who have little interest in corporate control. And that’s very important. Generally, Indian business families are obsessed with control of “their” companies. The ease with which promoters sell off companies in the US is absent here. There, at the right price, most companies can be bought and sold; but not here in India.
Deals such as the one between HDFC and Carlyle suggest that this will change in future. The number of private equity funds hovering over India keeps growing. The number of deals that they get into will increase. So will the amount of money that they invest. Yet, it will be some time before India sees really large private equity deals of, say, $5 billion and above. But the day will surely come, perhaps with the next serious downturn in share prices—or when the government eases restrictions on investment in cash-burn sectors such as insurance and retail.
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