Lessons to be learnt from the Middle Kingdom

Lessons to be learnt from the Middle Kingdom

Last week, US private equity (PE) giant Blackstone Group Lp. teamed up with China National Chemical Corp., the Chinese state-owned chemicals company, to mount a $2.8 billion (Rs11,004 crore) buyout bid for Australian agrochemicals manufacturer Nufarm Ltd.

As the deal goes through its final motions this week, this might be a good time to introspect on the inroads that the Chinese government has made in the global PE sphere—and the absence of a similar vigour on the Indian side.

The Nufarm bid comes barely six months after the Chinese State Investment Co., China’s global investment arm, picked up a 10% stake in Blackstone for $3 billion.

The move, apart from bringing macroeconomic benefits to China in the medium- to long-term, also ensured that state-owned enterprises would get an exclusive peek into Blackstone’s global buyout moves and, in turn, Blackstone would become a preferred partner for such enterprises seeking to privatize or enter new markets—as exemplified by the Nufarm deal.

Now, it is not that the Indian government has not made any moves to partner with the PE industry to the greater benefit of the country.

The India Infrastructure Finance Co. Ltd (IIFCL), an initiative launched by the finance ministry to address infrastructure financing, is working with multiple PE firms to set up a $5 billion India-dedicated infrastructure fund.

Blackstone and Citigroup, along with the state-owned IDFC, have already committed $250 million to the fund. A couple of weeks ago, UK’s 3i Group Plc. launched a $1 billion fund in partnership with IIFCL. But $6 billion is a drop in the ocean given the estimated $350 billion that India needs to get its infrastructure to world-class levels.

Public-private partnerships are perhaps the most effective way to address the vast development needs of sectors such as infrastructure, and PE would be an ideal partner—it has the money and the patience of a strategic investor.

However, it is difficult to ignore the fact that since the 2003 Punjab Tractors Ltd (PTL) deal, where UK investor Actis Capital Llp. bought a 28.4% stake from the state government, the country’s efforts to bring efficiency into state-driven sectors and state-owned businesses have not really gone anywhere.

Actis’ subsequent battle with the PTL management and its inability to push through corporate governance reforms served to make PE players wary of such deals.

Today, of the 300-odd PE firms active in the country, less than a handful put down privatization deals, or for that matter any kind of public-private partnership, as an investment thesis for India.

And of course, matters are further complicated by the current establishment’s aversion to private participation in government-owned enterprises. There’s also a sense of complacency because investor confidence in India is riding high.

This year, PE investments, announced for India are expected at $8 billion.

However, while the inflow of PE dollars will remain strong for some time, the activity India is seeing now is just a fraction of what can be achieved by business and economies by harnessing PE—both as a source of capital and a strategic investor. There are perhaps lessons to be learnt from China and the sooner we learn them, the better.

Snigdha Sengupta is Mint’s resident expert on private equity and venture capital.

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