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Buyout firms find the going tough in India

Some of the world’s largest buyout firms that made a beeline for India a few years ago now say they may have misjudged the market.

Firms such as KKR and Co. Lp and Carlyle Group Ltd say the world’s third fastest growing economy has more companies that need growth capital than those ready for buyouts.

In other words, these global private equity (PE) firms with large funds and specializing in taking over companies are wary of acquiring controlling stakes in Indian firms in the current environment. They would rather make growth-stage investments like smaller private equity firms do, typically in the $10-35 million (Rs46-161 crore) bracket.

Graphics: Paras Jain / Mint

“It’s a fact that in India, larger opportunities lie in growth capital. The percentage of buyout prospect is much smaller,” said Rajeev Gupta, managing director overseeing the buyout team at Carlyle India Advisors Pvt. Ltd. “In this regard, the Indian market is similar to the private equity market of China. It’s a very Asian character.”

Carlyle India’s current portfolio includes a 5.6% stake in the country’s home loan financier, Housing Development Finance Corp. Ltd, made at an investment of Rs2,638.35 crore in mid-2007.

Buyouts comprise a mere 3-5% of the PE activity in India. According to industry estimates, buyouts comprise about 7-10% of PE activity in China and as much as 72% in the US.

Investors are gradually realizing that looking only at big-ticket deals may not take them a long way in India, said Sanjay Nayar, chief executive, KKR India Advisors Pvt. Ltd, on the sidelines of a private equity seminar in Mumbai last week.

KKR has so far made two investments in India. Its first deal in 2006 for Flextronics Software Systems, later renamed Aricent Technologies Inc., for $900 million is still the largest leveraged buyout in India.

In early 2008, KKR made a strategic investment of $250 million in Bharti Infratel Ltd, the telecom tower arm of India’s largest mobile phone firm Bharti Airtel Ltd.

Another hurdle for overseas buyout firms is that the tools they typically use in other nations may not apply in India. Debt leverage is one such. Globally, buyout firms leverage debt to buy companies. In India, the Reserve Bank of India (RBI) bars them from raising debt to buy companies.

Another India-specific issue is that many large business groups in India are owned by families and the promoters are usually not comfortable giving away management control.

It’s a complex situation, said Carlyle’s Gupta, adding that in India, families do not necessarily have to sell their companies. “The capital markets are developed and corporate governance is good. Overall markets are doing fine. So, capital is available from equity markets and these firms do not have to go to buyout firms.”

Besides, promoters in India prefer selling stake to strategic partners rather than lose management control to buyout firms.

“We have seen several cases where promoters say they want to sell out to a strategic partner as valuations offered by them are more often than not higher than those offered by buyout firms,” said K. Ramakrishnan, executive director, investment banking, Spark Capital Advisors (India) Pvt. Ltd.

The recession, though, has thrown open attractive opportunities for these firms, sans the hassle of taking over a firm.

“The sheer number of firms looking at growth capital is staggering,” said an executive with another buyout firm. “It’s time for us to tap them even if it means changing our investment plans a bit.”

He didn’t want to be identified because of company policy that bars him from speaking with the media.

According to investors, growth capital is likely to dominate private equity business in India for another decade. “It will be later on that buyouts will come into full play,” said Raja Kumar, chief executive, UTI Ventures, an Indian private equity firm.

Meanwhile, India’s needs for PE funding continue to be large. PEs contribute 3-6% of the foreign institutional investments into India and the country needs $85-90 billion from PE companies, according to management consultancy firm McKinsey and Co.

While none of the investors that Mint spoke to has lost interest in backing Indian firms, they say high valuations continue to play spoilsport. “While markets seem to be looking up from a deal flow perspective, valuations also continue to get high,” said Nitin Deshmukh, chief executive, Kotak Private Equity Group. “This has and will keep pressure on new deals.”

And with buyout firms digging deeper into India’s growth capital needs, PE firms said it would make business tougher for them. “Its a fairly competitive market. There is no denying that their arrival will make striking deals harder,” said Amit Chander, investments head, healthcare and education, Baring Private Equity Partners India Ltd, which does both growth and buyout deals in the country.

Source: Livemint

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