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True potential of PE yet to be unleashed in India

The growth of private equity (PE) as a separate asset class across the globe in the last few years has been remarkable and highly discussed at various investment opportunity forums. These PE funds were able to successfully attract huge amount of capital from investors such as pension funds, insurance funds, universities, foundations and other investors who were looking for new avenues for investment. Many attribute the success of this new asset class to strong global liquidity and stability witnessed in the world economy. The growth of private equity has reached such a stage where it constitutes a significant portion of global mergers and acquisitions (M&A). In 2006, deal values of global M&A were reported around $3.7 trillion, out of which 25% of the amount was funded through PE. In the earlier years, PE contribution to the total M&A activity constituted hardly 10% of all the M&A deals. These figures speak out the dramatic change this industry has undergone in the last few years.

Now flush with cash, these private equity firms are trying to globalise their activities by diversifying and deploying their funds to new geographical areas. With India emerging as an economic powerhouse, and domestic companies showing great appetite for mergers and acquisitions both domestically and globally, India has become very much a part of their top priority list. India was ranked at twelfth position in the total M&A deal value and volume in CY06, whereas it has managed to climb to seventh position in the first three months of CY07. And private equity firms are eyeing this new found desire of India INC’s empire building plans to capitalise on.

This development comes at a time when there is a growing need felt in India for an alternative avenue of fund raising for small and medium enterprises (SMEs) just like Alternative Investment Market (AIM) of the London Stock Exchange (LSE). Many feel that private equity can act as an alternative source of raising finance and fill this gap to a great extent.

Sandeep Gill, MD, Deloitte Corporate Finance Services India, said, “Private equity can act as an alternative source of fund raising for small and medium enterprises. With private equity investment, these firms will not only be able to get the much needed resources for their future expansion and growth but would also be able to leverage the expertise of these private equity to both drive operational performance and access global markets. With the participation of private equity, the system of corporate governance, financial reporting etc will dramatically reach global standards.”

But still industry experts say the full potential of private equity investment in India has not been unleashed yet. There are certain hurdles, which are coming in the way of private equity investment in India. The most important one is the FDI cap prevailing in certain sectors such as telecom, aviation, banking, insurance, NBFCs etc which is limiting their scope of investment in India. Even if they make any investment in these sectors their exit becomes difficult due to these sectoral caps.

The new guidelines issued by the government on overseas issue of preferential shares, though rightly intended to restrict the flow of money into the Indian real estate sector, has hit the overall private equity industry itself.

The preferential issue of shares was through which correct valuations of a company were reached and deal structured. The new guidelines have put certain restrictions on the deal structuring capability of private equity players intending to invest across the sectors, admits a domestic private equity player who did not wish to be named.

Another major issue confronting private equity investors is limited number of good companies available for investment because of lack of proper financial information and other materials. This has resulted in large funds chasing few of them making it difficult to gain entry. This in turn is pushing up their valuations higher which often tends to affect their future returns.

Then there are many mid-sized enterprises, which are largely family controlled and where the entrepreneurs are not willing to dilute control over the management. But most PE firms want a say in the management and functioning of the company.

Inspite of these challenges, the Indian PE market is booming and the industry is bullish on its growth prospects. Certain sectors which are looking good are pharma/biotech, real estate/construction, infrastructure, manufacturing, retail, IT and IT-related services.

Recently, General Atlantic, Goldman Sachs and Saif Partners picked up stake of 5% each in the National Stock Exchange. Another private equity fund Chrys Capital has invested $24 mn in Mankind Pharma. In 2006, the Carlyl group invested $20 mn in Claris Lifesciences. Industry sources say private equity firms are active in Indian real estate and infrastructure sectors. They invest in Special Purpose Vehicles (SPVs) set up by these companies and pick up stake in established real estate companies.

In 2006, private equity investment rose by over 230% to $7.46 billion compared to $2.26 bn invested in 2005. The first quarter of 2007 has already witnessed an investment of $2.5 billion from private equity firms up from $1.27 billion during the same period, according to data released by Venture Intelligence.

Overall, there is a broader consensus among private equity players that India is a suitable destination offering great opportunities for the growth of private equity investment. It is only a matter of time, say experts, when the huge potential in this industry will be realised.

Source : Financial Express

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