Markets & Finance

Investors Unbowed About India


Malon Wilkus knows what it is like to have a fleeting, but all-too-close brush with terror. The chief executive of the private-equity firm American Capital, based in Bethesda, Md., was visiting London last year and rode the subway to the same station that was ripped apart by a bomb blast one day later. Shaken as he was, Wilkus didn't change how his firm manages the $900 million fund it set up to invest in European companies. "The same goes for India," says Wilkus, whose firm has $150 million invested in Indian companies today.

Wilkus' statement of confidence is a shot in the arm for a country that is reeling from the series of deadly bomb blasts on July 11 in Mumbai, India's financial capital. It also gives a degree of self-assurance to India, which is still an emerging economy, albeit a fast-growing one. The billions of dollars from private-equity and venture capital firms that are pouring in have greatly benefited the companies and especially the entrepreneurs in India.

In the wake of the terror attacks, there have been questions about whether foreign investors will pull back from India. After all, the country is competing for capital against countries such as China, which has not had such regular outbreaks of violence. Also in question is whether outside investors will change how they invest in India, perhaps trying to steer clear of key economic centers like Mumbai or Bangalore. "While the initial market reaction is not bad at all, I believe that everybody has their antennas up; and if there is a second terrorist incident, it would raise questions and possibly hurt the investment climate," says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania.

"NO SAFE HAVEN." Although the blasts wreaked havoc in the city and claimed 183 lives, they so far have not spooked people like Wilkus and others in the financial community in India. The Bombay Stock Exchange's benchmark Sensex closed up 3% on the first day of trading after the blasts. "There is enough liquidity in the market, and India has a history of bouncing back from such mishaps. Even this will pass," said Rajesh Mehta, chief analyst at Standard Chartered Bank.

Indeed, many investment strategists believe that big cities in the world are ready targets and that it would be naive to imagine global investors go into any country believing that such incidents will never occur. "Terrorism is unfortunately part of the geopolitical landscape in any part of the world—there is no safe haven per se," says Ed Yardeni, chief investment strategist for Oak Associates, a money management firm. "And fast growth and success, like the kind that India has had, attract terrorists who want to disrupt it."

Of course, India has been a hot growth story in the last few years. Investors from around the world have poured billions of dollars into the stock market and reaped huge gains as the stock market index almost doubled in the first five months through May 10, before falling back (see BusinessWeek.com, 5/23/06, "India's Market Turns Down the Heat").

BILLIONS AT STAKE. Private-equity investors and venture capitalists have also rushed in to take advantage of the country's torrid growth. According to consultant Bain & Co., the amount of private equity allocated to investment in India has surged at a rate faster than for any other Asian country in recent years, rising at a 51% compounded annual rate since 1998. Using the benchmark of deal value as a percentage of gross domestic product, Bain estimates that India's private-equity market has the potential to expand fourfold.

According to Bain, there are now more than 30 funds totaling $4 billion scouring the country for deals. Among the largest players are Blackstone Group, which has earmarked $1 billion for Indian acquisitions, and Carlyle Group, which has created three Asian funds totaling $1 billion and even opened a Mumbai office in late 2005. In April, American buyout specialist Kohlberg Kravis Roberts & Co. acquired 85% of Flextronics Software Systems, the Bangalore-based software division of Flextronics International (FLEX), in a deal valued at approximately $900 million. "(The attacks) will lead people who invest in the country to be nervous for a little while," says Markus Schomer, global economist with AIG IG, the investment arm of financial-services giant AIG. "But once the initial reaction dies down, it will be business as usual. I don't think we'll see any significant change in the flow of investments into India, and that includes private equity."

American Capital CEO Wilkus is clearly positive about the country's prospects. His firm recently bought Indian electronic publisher TechBooks for $45 million, and he plans to continue to invest in the country in years ahead. "We have two offices in Europe and nine in the U.S.," he says. "The next thing on our agenda is to establish an office in Asia—and it will likely be in India."


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