Private equity makes inroads in India
Rina Chandran | Saturday, 23 August 2008
Private equity is gaining greater acceptance in India where rising borrowing costs and a tanking stock market have shut down other means of funding, forcing family-owned businesses to tap a source they had once shunned.
"It's a question of survival now," said Vishal Sharma, chief executive of Tuscan Ventures, a private equity firm focused on logistics, which has closed three deals in the past year.
Indian companies have in recent years embarked on ambitious expansion plans, bolstered by plentiful cash and low interest rates as the economy grew nearly 9 percent annually.
But a global credit crunch and soaring commodity prices have taken a toll of late. Inflation has climbed to its highest in more than 13 years, driving interest rates to seven-year peaks. Economic growth is expected to moderate this year, while the stock market has fallen nearly 30 percent in 2008, beating down company valuations.
"The tough times are forcing firms to evaluate their business plans and look for help to ride out the storm," Sharma said.
Private equity investing in India and China held steady in the first half of the year, the Asia Venture Capital Journal said, with India seeing a 3.2 percent rise to $6.8 billion, and China registering a 3 percent gain to $5.8 billion.
Indian private equity deals typically involve little leverage, and private equity (PE) firms have often done growth capital deals and late-stage investments, buying small stakes in private and listed firms.
Still, private equity firms have had a tough time convincing family-owned businesses to surrender some control in return for cash, especially as a six-year bull run meant these companies could get generous valuations from the stock market. With easy IPOs a thing of the past, firms are coming around.
"When the markets recover, firms will choose to tap the market again, but they may now also go to PE, as they are recognising the value-add that PE brings," said Arun Natarajan, chief executive of research firm Venture Intelligence.
Emerging markets' share of private equity deals this year may go beyond the 10 percent it got in 2007, or about $57 billion, according to London-based Emerging Markets Venture Capital Association.
Indian family-owned firms tend to be sprawling entities with diversified interests and lacking clear succession plans, which makes smaller firms particularly vulnerable at this time.
"Even speaking to a private equity firm was unheard of a couple of years ago for a family-owned business," Natarajan said.
"They see the merit now in selling non-core assets or a stake to PE. It is seen as a better option to selling out to a rival."
Tuscan's Sharma said companies in India were also realising they want the expertise that private equity brings along: "They want more than just a cheque. They now want smart money." Awareness of the role of private equity has grown and that has helped deal making, said Vikram Nirula, a partner with India Value Fund, which manages about $600 million in assets.
"There have been some high-profile deals and even buyouts, like Blackstone's buyout of Gokaldas Exports," he said, referring to $165 million deal in 2007 for the apparel maker.
Even large conglomerates have embraced private equity: Kohlberg Kravis Roberts earlier this year put $250 million in Bharti Enterprises, the parent of top mobile operator Bharti Airtel, while Providence Equity Partners recently invested $640 million in Aditya Birla Telecom.
But the battle for more acceptance is far from being won.
"Founders have gotten used to aggressive valuations and many are prepared to wait for the markets to recover," said Amrish Baliga, director of global markets, Deutsche Bank.
"PE is also waiting in the hope of lower valuations. Whether deals get done now is a matter of who will blink first."
Even now, only four out of 10 developers were opting for private equity despite delays to projects, said Sameer Nayar, head of real estate finance, Asia Pacific, at Credit Suisse, which recently put in $113 million in Indu Projects.
"Many of them are still in denial," he said.
"There are still some stages to go before they get to acceptance. But we're not in a hurry, we can wait."
"It's a question of survival now," said Vishal Sharma, chief executive of Tuscan Ventures, a private equity firm focused on logistics, which has closed three deals in the past year.
Indian companies have in recent years embarked on ambitious expansion plans, bolstered by plentiful cash and low interest rates as the economy grew nearly 9 percent annually.
But a global credit crunch and soaring commodity prices have taken a toll of late. Inflation has climbed to its highest in more than 13 years, driving interest rates to seven-year peaks. Economic growth is expected to moderate this year, while the stock market has fallen nearly 30 percent in 2008, beating down company valuations.
"The tough times are forcing firms to evaluate their business plans and look for help to ride out the storm," Sharma said.
Private equity investing in India and China held steady in the first half of the year, the Asia Venture Capital Journal said, with India seeing a 3.2 percent rise to $6.8 billion, and China registering a 3 percent gain to $5.8 billion.
Indian private equity deals typically involve little leverage, and private equity (PE) firms have often done growth capital deals and late-stage investments, buying small stakes in private and listed firms.
Still, private equity firms have had a tough time convincing family-owned businesses to surrender some control in return for cash, especially as a six-year bull run meant these companies could get generous valuations from the stock market. With easy IPOs a thing of the past, firms are coming around.
"When the markets recover, firms will choose to tap the market again, but they may now also go to PE, as they are recognising the value-add that PE brings," said Arun Natarajan, chief executive of research firm Venture Intelligence.
Emerging markets' share of private equity deals this year may go beyond the 10 percent it got in 2007, or about $57 billion, according to London-based Emerging Markets Venture Capital Association.
Indian family-owned firms tend to be sprawling entities with diversified interests and lacking clear succession plans, which makes smaller firms particularly vulnerable at this time.
"Even speaking to a private equity firm was unheard of a couple of years ago for a family-owned business," Natarajan said.
"They see the merit now in selling non-core assets or a stake to PE. It is seen as a better option to selling out to a rival."
Tuscan's Sharma said companies in India were also realising they want the expertise that private equity brings along: "They want more than just a cheque. They now want smart money." Awareness of the role of private equity has grown and that has helped deal making, said Vikram Nirula, a partner with India Value Fund, which manages about $600 million in assets.
"There have been some high-profile deals and even buyouts, like Blackstone's buyout of Gokaldas Exports," he said, referring to $165 million deal in 2007 for the apparel maker.
Even large conglomerates have embraced private equity: Kohlberg Kravis Roberts earlier this year put $250 million in Bharti Enterprises, the parent of top mobile operator Bharti Airtel, while Providence Equity Partners recently invested $640 million in Aditya Birla Telecom.
But the battle for more acceptance is far from being won.
"Founders have gotten used to aggressive valuations and many are prepared to wait for the markets to recover," said Amrish Baliga, director of global markets, Deutsche Bank.
"PE is also waiting in the hope of lower valuations. Whether deals get done now is a matter of who will blink first."
Even now, only four out of 10 developers were opting for private equity despite delays to projects, said Sameer Nayar, head of real estate finance, Asia Pacific, at Credit Suisse, which recently put in $113 million in Indu Projects.
"Many of them are still in denial," he said.
"There are still some stages to go before they get to acceptance. But we're not in a hurry, we can wait."