PE penetration in India is rising, say foreign investors

PE penetration in India is rising, say foreign investors

Mumbai: Returns from Indian private equity (PE) may not have met investor expectations, but India is the most penetrated PE market among all emerging market nations, including China, Brazil and Indonesia, say foreign investors.

Since 2005, the number of PE and venture capital (VC) funds operating in India has increased sharply.

The Indian Venture Capital Association estimates that there are close to 1,000 domestic and foreign funds in India, of which about 400 funds have done at least one deal. And 165-170 funds, the active ones, have done three to four deals in a year.

The Indian PE market will remain attractive for the next five to 10 years because of the growth in the country and the fact that the European and US markets have slowed, said limited partners (LPs) or investors in PE funds at a conference held in Mumbai by PEI Media.

“There is a bigger merger and acquisitions market here and exits are possible even if the capital markets are volatile," said Varun Sood, managing partner and co-founder, Capvent AG, a Swiss-based fund of funds.

On the other hand, there is a surplus of capital in China and the returns that have come are from initial public offers, Sood added.

The number of funds in India has increased not only because of the entry of global funds, but also because many independent fund managers have left companies to start their own funds, especially over the past year. Today, LPs expect a net return of 15-20% from Indian PE deals. PEs themselves expect a return of 25-30%.

Another change in the mindset of LPs is that they have become more open to the idea of backing funds that invest in public companies only (private investment in public equity, or PIPE funds).

Fund managers typically used to invest only a small portion of the funds available, around 10-15%, in PIPE deals. Today, PIPE funds are being raised.

IL&FS Investment Managers Ltd, for instance, is raising a $250-300 million PIPE fund. In February, four partners of Sequoia Capital India Advisors Pvt. Ltd quit the firm to focus on PIPE investments.

Investors say private companies are usually valued at a premium, while public companies are valued at the market price, or, in times such as these, even at a discount.

Still, PE firms and LPs said investing in India wasn’t easy.

“Investing in India is not (just) difficult, it’s emotionally draining," Dalip Pathak, managing director, Warburg Pincus Llc, said at the conference.

According to him, uncertainty and constant changes in the regulatory environment make it so.

“Policy drifts make it difficult to hold on to an investment for long in India," said Pathak, who added that the return on equity (ROE) from India has been more consistent than in any other part of Asia, implying that, at the end of the day, an India play is worth the trouble.

Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture capital activity in India.