India is becoming a powerful magnet for private equity investment. To realise its potential, however, private equity investors and Indian companies must recognise what each brings to the table. By some measures, India is poised to become the next big market in private equity.
There have been big deals, such as the $900 million paid in 2006 for Flextronics Software Systems (now called Aricent) by KKR, the US leveraged-buyout pioneer. There have been big successes, including the completion of the sale in 2005 by Warburg Pincus of its stake in Bharti Airtel for $1.6 billion.
And there is certainly big interest: Well over 100 private equity funds are scouting for deals, making India the fastest-growing private equity market in Asia, with a 67 per cent compounded annual rate since 2002. Yet these numbers, while impressive, tell only part of the story. The full picture is more complex.
Although it's growing fast, private equity in India has yet to show the scale of returns and deal volume that make PE a force in other global markets. When Bain & Company analysed nearly $15 billion in private equity investments between 2000 and 2006, most of the largest deals--more than 70 per cent -- were less than $150 million.
The average deal size was $21 million -- less than one-third the size of the average PE investment elsewhere in Asia. Meanwhile, skepticism of private equity still runs deep among many Indian entrepreneurs as they weigh whether the potential advantages PE partners bring to the table justify diluting their financial interest and control.
Can PE firms and the Indian companies they are courting bridge the gap? The answer, undoubtedly, is yes. The right question, in fact, is not
whether private equity will blossom in India but
when? Based on our experience, that will depend on the readiness of private equity firms to adjust their approach to India, and the willingness of Indian companies to see the opportunities in tapping the expertise of private equity partners.
The challenge for Indian companies is to recognise that PE firms bring more than money to a deal -- they also bring international networks that can help fill gaps in growth strategies, build alliances and add management depth. For their part, PE firms need to adapt their approach, picking targets carefully in industries where they can bring their distinctive skills to bear.
Sizing up the opportunityThe value of this approach was underscored by a recent survey conducted jointly by Bain & Company and
Knowledge@Wharton, the online business journal of The Wharton School at the University of Pennsylvania.
The survey gathered the opinions of nearly 150 global PE investors active in India, their local counterparts, and Indian entrepreneurs and executives. Among the highlights: Sixty per cent of survey respondents said the investment climate in India is more attractive than in Japan or South Korea, while 40 per cent agreed that India is more attractive than China.
Over the coming three years, moreover, a majority anticipate that China and India will be on par as Asia's most attractive destinations for private equity investment. In general, India is perceived to be a friendlier investment environment than China, with survey respondents indicating that Indian businesses are less hamstrung by government regulations and have an easier time recruiting experienced managers.
They also say it is easier to negotiate and close a deal in India compared with China. For example, 71 per cent told us that Chinese corporate accounts suffer from a lack of transparency, compared to just half as many who said Indian companies' finances are difficult to track.
In one important area, however, respondents give China an edge over India: Valuations are more expensive in India. Nevertheless, private equity firms are rolling out plans that reflect their confidence that India presents attractive opportunities.
Among firms in our survey sample, three-quarters anticipate at least doubling the amount they invest over the next three years. There was broad agreement among PE investors and Indian executives who responded to the survey about which sectors are most appealing. But there was also consensus about bottlenecks that may diminish India's attractiveness.
Not surprisingly, poor infrastructure was the No 1 concern; 68 per cent of respondents described it as a "challenge" or "major challenge." More than 40 per cent thought that high asset values will continue to crimp opportunities for private equity. Also ranking high were worries about whether the supply of skilled workers can keep pace with the demand, as well as concerns that onerous government regulations could curb India's appeal. Whether India's young private equity market ultimately delivers on its promise will depend on how Indian companies and PE investors learn to capitalise on each other's strengths. Indian executives will have to discover what these deep-pocketed newcomers can do help their companies flourish. For their part, private equity firms should be willing to invest patience as well as cash in cultivating relationships.
Indian companies: It's not just about the moneyOverwhelmingly, survey respondents said that access to capital was the principal advantage private equity firms bring to a potential relationship. Yet three out of five Indian executives said that they would prefer to finance their companies' growth through a public stock listing, and roughly two out of five prefer debt financing or a capital infusion from a strategic partner to the potential entanglements that come with a private equity investment. Private equity merits a closer look. Indian companies stand to benefit most in three areas:
Fill gaps in long-term growth strategy. With their hands-on experience working with companies in a wide range of industries, private equity partners can help Indian companies accelerate their growth. In mid-2006, for example, managers at Claris Lifesciences, a leading pharmaceutical manufacturer based in Ahmedabad, accepted a $20 million investment from The Carlyle Group, the US private equity firm, to help fund its growth plans. Beyond the modest cash infusion, Claris anticipates getting a big operational boost from Carlyle's managerial input and connections that will enable Claris to speed up its penetration of key export markets. Carlyle's deep bench of US and European advisors will help Claris tailor the right strategies for each market and engage technical experts who can advise Claris on, among other things, how best to organise itself to meet US Food and Drug Administration standards. Another Carlyle unit in Japan, meanwhile, is working with Claris managers to line up reliable, cost-efficient offshore raw material suppliers. Shankar Narayanan, Carlyle India's lead director, says that his firm's role is to "act as a catalyst to Claris's transformation into a major pharma player."
Forge the right alliances. With the introductions that a private equity partner can provide, world-class Indian companies gain access to new customers, suppliers, and the opportunity to join forces with other enterprises in the PE firm's portfolio. Nimbus Communications, a diversified media company based in Mumbai, is harnessing its business goals to the network connections of 3i, the big London-based PE firm. Nimbus' founder and chief executive Harish Thawani acted to jump-start his company by selling 3i a 33 per cent stake in Nimbus for $45.5 million in August 2005. Nimbus is looking to 3i for introductions to potential partners from among its portfolio of 1,500 companies around the world, and is tapping the industry expertise of the firm's 300 investment professionals. Nimbus and 3i plan to deploy those resources to acquire broadcast rights, fund TV and feature-film production, and develop digital content for wireless distribution. Says Thawani: "We share a common belief in the global abilities of Nimbus, and that's where I believe 3i will add strategic value."