India Inc remains strong on foreign investors' radar with the private equity market in the country set to more than triple to nearly $7 billion by 2010, from $2.2 billion last year, a new study shows.
US-based global business consulting firm Bain & Company said in a report today that a growing consumer class in the country and increasingly differentiated skill set are two major economic forces driving the estimated surge in the size of the Indian private equity market.
However, PE investments in the country through 2010 was expected to remain focussed on traditionally smaller growth-capital investments.
Transformational mega-deal buyouts, similar to those in the US and other developed markets, are far more difficult to execute here given government limits on access to foreign leverage and the reluctance of family-controlled businesses to cede control, it said in its India Private Equity Outlook report.
However, recent signs of a change in attitude could sign the emergence of a nascent buyouts market, the report added. "We have observed early signs that the traditionally strong opposition to change in control issues may be starting to diminish," Bain & Company's Private Equity Practice division head in India and author of the report, Sri Rajan said.
"Though it's too early to state categorically that a sea change is underway, removal of this roadblock could pave the way for the emergence of a private equity buyouts market in India."
"The combination of a growing Indian consumer class and an evolving set of differentiated Indian skills will fuel attractive private equity growth and investment opportunities in India over the next five years," Rajan added.
The study revealed that private equity ownership clearly reflects the maturity of a particular Indian business sector.
Percentage ownership was greatest in business processing outsourcing at 40 per cent, followed by 23 per cent each in textiles and media and entertainment.
Relatively less private equity ownership was seen from 2000 to 2005 in emerging sectors such as financial services (17 per cent) and healthcare (15 per cent).
Bain said that the PE investors should target new sectors benefiting from the rise of the consumer class such as healthcare, real estate, banking and credit.
It added that India's economy is largely being built by closely-held family businesses, with minority private equity investors having less scope to hire and fire. Therefore, PE funds should forge key local relationships with experienced entrepreneurs and managers who are familiar with fast-changing markets.
Limited availability of secondary market data, high asset valuations and government restrictions are among the significant challenges for PE players in India.
"Private equity investors in India should follow a few simple rules," Rajan said. "Target the beneficiaries of a growing consumer class, forge key local relationships, leverage global networks, and plot a flexible course to exits."
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