Global Economics

Private Equity Parties Hearty in India


The total value of '07 deals is at a record level as Blackstone and other foreign firms chase investment opportunities in the hot Indian economy

Private equity firms from the U.S. have been sniffing around India seriously for over a decade now. But in the past year, the private equity investor has been working overtime. In the country's five-star hotels, top restaurants, and airport VIP lounges, dealmakers in dark suits are omnipresent, carrying stacks of papers and looking for investments in everything from banking and financial services to real estate, health care. technology, and media.

What's bringing them to India is a combination of the country's rising consumerism, impressive growth in gross domestic product, and a hot stock market. Now private equity deals are hitting record levels: $10.8 billion in the eight months of 2007, way above the $7.8 billion invested in all of 2006, according to Grant Thornton International, one of India's oldest accounting firms. Money is pouring into companies on the growth curve, those that are about to gain access to the capital markets, and even listed companies looking to expand.

Local private equity firms are getting in on some of the action, but the foreigners dominate by a long shot, with 70% of the total deals. The top 10 investors are all foreign players, including global heavyweights such as Blackstone (BX), Carlyle, General Atlantic, and Warburg Pincus. Vikram Utamsingh, executive director and head of private equity practice at consulting firm KPMG, says that he's never seen anything like it before. "After China, India is the most sought-after destination for investors in Asia," he says. Bankers are getting a wedge of the benefits too, as they help facilitate deals. At Kotak Investment Bank, a local Mumbai subsidiary of Kotak Mahindra Bank, deal flows are up 50% compared to a year ago, and KPMG has been referring 25% more deals since 2006.

Smaller Deals

The Blackstone Group is one firm that has increased its India profile. The New York-based private equity firm first came scouting in India in 2005 and recently has elevated India to one of its key strategic destinations in Asia. Initially Blackstone was slow off the starting line, doing just one $50 million investment in its first year, in Emcure Pharmaceuticals, a 26-year-old, privately owned producer of active pharmaceutical ingredients. But it's gaining speed. Already this year, Blackstone has pumped $760 million into four ventures—Nagarjuna Construction, garment maker Gokaldas Exports, media company Ushodaya, and outsourcing outfit Intellinet—with deal sizes varying from $125 million to $275 million.

Compared to activity in other countries, Blackstone does mostly small deals in India, since the market is not as mature and businesses are smaller. Take, for instance, the 25% stake it took in July 2006 in Emcure for $50 million. Akhil Gupta, managing director of Blackstone in India, claims that in the U.S., no Blackstone deal would be less than $250 million. "India is a different market and flexibility is the buzzword," he says.

With so many players fishing in the same waters, there's a rush for the same deals. In part, that's because the continuing upsurge of the Mumbai bourse has made listed companies expensive. (The benchmark Sensex index is up 40% in the past year.) Moreover, while deals are still small, the average size has increased from $26 million in 2006 to $40 million this year. Two months ago, India's largest private-sector bank, ICICI Bank, announced plans to transfer its insurance and asset management businesses into a holding company. The first round of bidding for a 5% stake in the proposed new entity, say investors, had 20 private equity suitors, including Citigroup (C), as well as local players ChrysCapital and New Silk Route. It was then whittled to four—Goldman Sachs (GS), Sequoia Capital, Nomura, and Swiss Re—who have together pledged $500 million. More recently, when India's second-largest telecom player, Reliance Communications, hived off its telecom tower business, two dozen private equity investors joined the race. The 5% stake, up for sale for $337.5 million, was finally bagged by seven global private equity investors and financial institutions, including Fortress Capital, New Silk Route, and Galleon Group.

Prime Sector: Real Estate

By far, the segment that dominates private equity investment in India is the red-hot real estate sector. A third of all private equity investments this year have been in real estate, followed by banking and financial services and manufacturing. Morgan Stanley (MS) has invested $217 million in local property deals so far this year, buying both assets as well as stakes in developers. According to a Morgan Stanley spokesman in Hong Kong, the investment bank plans to open a private equity office in India next year, its first in the country.

So far, the record for the largest deal this year by a single investor goes to Carlyle. In May Carlyle picked up a 5.8% stake in India's largest mortgage player, HDFC, for $650 million. This was a global first for Carlyle, which broke tradition to pick up a small stake to get substantial strategic influence, according to a source close to the deal. Carlyle was not available for comment. Carlyle is now the second-largest shareholder in HDFC after Citibank, which has a 12.3% stake. Since the Carlyle investment, HDFC shares have risen 44% to $63.

Deals like these are also a sign of conservative and highly regulated India opening up to new financial instruments. "The market for buyouts is growing, but it's still small," says Sumir Chadha, managing director of U.S.-based Sequoia Capital. In fact, buyout deals account for barely 4% of the Indian private equity market, say investors. In the first half of 2007, buyout deals touched $440 million, a threefold jump from the whole of 2006.

Family Businesses Go Global

Riding these ambitions, India's family-dominated business culture is thawing to the idea of private equity in its otherwise secretive operations. Data from research firm Venture Intelligence shows that in the first half of 2007 23 family-owned businesses attracted $975 million in private equity compared with $1.2 billion in all of 2006. Many, of course, still prefer to seek capital via bank loans or stock exchanges, since some family-run companies fear outside intervention in management. But there are many who look upon private equity investment as a chance to learn the ways of global business, obtain sophisticated advice, and enter new markets and businesses internationally. Says Renuka Ramnath, chief executive of ICICI Ventures (the private equity arm of ICICI Bank, India's largest private-sector bank): "With competition, entrepreneurs now want to grow rapidly in the domestic market and increase their global footprint."

Last year, for instance, private auto component company Endurance Technology raised $33 million from the private equity arm of Standard Chartered. In February Endurance acquired a German die-casting and machining company. Gokaldas Exports, India's largest garment exporter, decided to sell out to Blackstone for $165 million in August. It had taken the Bangalore-based Gokaldas 35 years and 55,000 people to reach a turnover of $252 million in 2007, despite going public in 2005. "With increasing opportunities, we didn't want to spend another 35 years to double turnover," says Executive Director Rajendra Hinduja. With 55% of the business coming from the U.S., the group "wanted to leverage Blackstone's financial muscle and contacts," and gave up a 51% stake that will go up to 70% for $165 million.

As the deal is being finalized, Gokaldas is also negotiating with a couple of contacts referred to by Blackstone, and is talking acquisitions both in India and the subcontinent, hoping to boost revenues 25% this fiscal year. "Indian family firms are becoming objective and dispassionate about their businesses, especially with the younger generation coming into management—or wanting out of it," says Srividya Gopalakrishnan, partner in corporate advisory services at Grant Thornton.

Tremendous Potential

Private equity players are also careful about how they handle this most sensitive of investments. They take pains to assuage fears within the family concerned that there will be no change in management, particularly when the company is well run. "Family firms are increasingly seeing the benefits of private equity and want to participate in the growth by holding on to some stake," says Sughosh Moharikar, executive director at Kotak Investment Bank. He points to the Gokaldas buyout deal he brokered, where the three brothers of the Hinduja family will run the show and have a 20% stake in the venture, with Blackstone taking just a representation on the board—for now.

With buyouts accounting for a mere 4% of the entire private equity market, the potential is tremendous. In the last 18 months, private equity players raised $5 billion for India alone; they will be investing all of this at the same time as they finish finding a home for funds raised earlier. With that kind of money sloshing around, and more Indian family-owned companies and other public enterprises seeking private capital, it looks like the private equity party has only just begun.


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