Positive factors like GDP growth and policy reforms make the country a hub for private equityIndia has been a favored Asian destination for foreign private equity (PE) funds, contributing significantly to the country’s emergence in the past decade. But some experts warn that high PE returns may be a thing of the past.
A multitude of events have shaped the investment climate. India’s growing global stature, a more open economy and positive indications of reform have encouraged PE investment inflow over the years.
A KPMG report, Returns from Indian Private Equity, said that over the past decade, India has been among the most important emerging markets for PE after China, and often competes favorably with it.
“Lower dependency on leverage as compared to developing markets has really made India a safe PE destination,” says Ashutosh Dash, assistant professor of finance at the Gurgaon-based Management Development Institute.
“Alongside the GDP growth, market-based growth environment with attractive sustainable socioeconomic environment and regulatory regime are vital factors in making India a hub for PE investments,” he says.
Venture Intelligence, a PE database in India, indicates that the number of deals from 2000 to 2006 was 1,015, involving more than $14 billion, which went up to 1,306 during 2007 to 2009 with a total volume of almost $29 billion.
Recent years delivered another leap in the numbers. From 2010 to 2013, India witnessed a record PE investment of around $35 billion for 1,792 deals.
Favorable demographics, growing GDP and rising foreign direct investments, coupled with forward-looking policy reforms, led to an increase in investments from PE players last year.
According to annual transactions data released by VCCircle.com, a New Delhi-headquartered online financial information group, PE investments in India have risen 12 percent in value terms from $9.5 billion in 2012 to $10.68 billion in 2013.
“India’s 1.2 billion strong population, an aspirational growing middle income group, and per capita income growth continue to attract PE investors,” Sahad PV, founder and editor of VCCircle.com tells China Daily Asia Weekly.
The average deal value in 2013 increased by a third to $21 million from $16 million in 2012. Meanwhile big-ticket deals, those of over $100 million, constituted 56 percent of the total deal value in 2013.
In the top PE deal of last year, New Delhi-based Bharti Airtel, one of the largest providers of mobile and fixed telephony in India, raised $1.26 billion from Qatar Foundation Endowment.
According to reports, the deal is the largest PE investment in India in the last five years.
Dhanpal Jhaveri, partner and CEO of Everstone Capital, expects this PE growth will persist.
“Despite slowdown, the PE inflow to India will continue to grow in the long term, as the country has a unique position in the global arena with strong domestic consumption and a rapidly growing middle class,” says Jhaveri. “Global investors know the Indian market very well and they evaluate the country on an absolute basis.”
Last year also saw major PE deals like global investment firm Kohlberg Kravis Roberts acquiring a controlling stake in the Alliance Tire Group, a global tire maker, for $470 million from Warburg Pincus.
Baring Private Equity Asia acquired a 71 percent stake in Hexaware Technologies for $390 million in the same year, while PE major Apax Partners acquired GlobalLogic, an offshore software services provider, for $420 million.
Partners Group, based in Switzerland with $33 billion under management, has acquired a majority stake in CSS Corp, a management and technology support services company, for $270 million.
A sector-wide analysis shows that the top five industries in terms of deal value are the financial sector, which attracted deals worth $2,771 million, followed by consumer discretionary, IT, healthcare, and telecommunication services.
In terms of the number of deals, IT attracted 210, followed by consumer discretionary (152), financial (99), healthcare (73) and industrial (60).
India’s strength in the IT and ITES (information technology essential standards) sector first came to prominence in the late 1990s and early 2000s. Y2K risk mitigation services provided by domestic companies gave global investors confidence in India’s IT capabilities.
As a result, 60 percent of PE investments in the early part of the decade went to the IT sector. The peak year of 2007 witnessed a shift in the focus toward real estate, construction, telecom, media and entertainment, which made up more than 50 percent of the total PE investments during the year.
Dash from the Management Development Institute cites the increase in the internal rate of returns (IRR) to PE investment in emerging countries as a reason for the huge inflow during the period.
“IRR grew significantly during the last decade as compared to the 1990s. The IRR to PE in India during the second half of the last decade has touched about 18 percent,” he says.
In 2010, investments continued in the real estate and construction sector, with a total investment of around $2 billion. However, the power and energy sector was top in terms of value. In 2011, there was a shift from commercial and residential to large infrastructure projects such as airports, ports and roads.
Nevertheless, over the years, the rise in deal volume and value indicates the attractiveness of India.
The true measure of success of a PE investment is based on fund exits, as PE funds are typically structured with the philosophy to exit profitably over a period of time.
And in India, experts say that for the past few years this is the major bone of contention, as the PE sector has seen many a “meaningless” exit.
“It is imperative for PE funds to get the desired returns,” says R Vaidyanathan, professor of finance at the Indian Institute of Management Bangalore. “Retrospective taxation and lack of exits combined with political uncertainty are the major concerns which have affected PE in India recently.”
According to a KPMG report, India has fallen well behind China in exits. Exit value for China was $8.7 billion in 2010, nearly twice the exit value for India in 2010.
Another database says that PE exit transactions in 2013 amounted to about $3.6 billion from 158 exit deals, compared to $4.86 billion worth of exits spread across 172 deals in 2012.
However, Kaushik Dutta, director at the Thought Arbitrage Research Institute, who is studying the effects of PE in India, says the inflow of capital into emerging markets was fuelled by high economic growth in emerging economies as compared to flat growth in many developed countries.
“This was driven by the expectation that the arbitrage of growth between the developed and emerging economies might bring in new opportunities with high growth in valuations,” he says. “Unfortunately, the double-digit growth of emerging economies is a thing of the past and the US economy is showing signs of recovery, hence capital would move to developed economies.”
Dutta says that apart from the macroeconomic effects of slow growth, policy indifference, the devaluation of the rupee and limited exit options have affected the absolute returns of the PEs and hence their interest.
The exit environment is predicted to be volatile and difficult in the coming years.
A Deloitte study, Private Equity: Fueling India’s Growth, indicates that if India wants to remain attractive, clarity is required with respect to the regulatory framework.
“For India to grow, the role of PE and the government-led initiatives need to go hand-in-hand,” the report said. “With the changing investment requirements of companies, the role of the government ideally needs to evolve from merely a standalone policymaker to a facilitator of investments.”
However, Sidharth Birla, president of the Federation of Indian Chambers of Commerce and Industry concludes: “New governmental measures will help in broadening of the Indian financial market and utilization of risk capital.”
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