September 2008
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PE funds continue to bet big on India

India does not seem to be losing its sheen among private equity, or PE, investors even as the global liquidity crunch is now assuming significantly larger proportions and investors are increasingly turning bearish.

According to the investment banking arm of Mumbai-based financial services house JM Financial Consultants Pvt. Ltd, 13 of the world’s 20 largest PE funds — in terms of fund mobilization in the past five years — have already invested in India. Besides, two more — Apollo Global Management Llc. and Bain Capital Llc. — have recently set up offices here and started seeking deals.
This means only five of the world’s top 20 firms — Permira Advisers Llp., Terra Firma Capital Partners Ltd, American Capital Ltd, Silver Lake and Cerberus Capital Management Lp — haven’t come to India yet.
If investors as well as those who advise companies on PE transactions are to be believed, India will continue to be the top attraction for these big-ticket investors given that it’s still a part of that exciting asset class called emerging markets.
JM Financial has sourced data on the largest fund-raisers from Private Equity International, a London-based information and research provider on global alternative assets, including PE.
Bhavesh A. Shah, executive director of investment banking at JM Financial, said these large funds will continue to be interested in India and more so now, provided valuations are correct, deal sizes increase and the potential for buyout opportunities goes up.
India’s most tracked equity index, the Bombay Stock Exchange’s Sensex, has shed 33% in value since January , with its price-earnings multiple having dropped to 17.5 from the 28 levels seen early this year. A company’s price-earnings multiple is the number by which one would need to multiply its per-share earnings to get its current share price. A high multiple suggests that the stock is expensive, but it could also mean that the investors expect higher earnings growth in the future.
In the first eight months of this calendar year, at least $9.4 billion flowed into India from PE investors, according to JM Financial, higher than $7.8 billion in the corresponding period last year.
“To begin with, most of these funds will invest from their global funds and some of them may have earmarked a portion for Asia and within that India. Opening offices in India will be independent of India-specific fund plans. Offices in India will help them source good deals and being in India would bring them closer to the investee companies,” Shah said.
There were reports earlier this year in the international media about Europe-based PE fund Permira Advisers Llp.’s expansion into India. Permira had put out a recruitment advertisement in newspapers looking for an experienced private equity professional to “help establish a presence on the Indian subcontinent”.
In an email response to Mint’s query, Permira said: “The recruitment advertisement we published has been widely misinterpreted.” While there are no immediate plans to establish a permanent presence in India, the firm has been monitoring the Indian market for some time because it believes India may well offer long-term potential, the mail said.
New York-based Cerberus Capital Management Lp., whose current investments include an 80.1% stake in auto maker Chrysler Llc., too, had been in the news for its interest in setting up shop in India. “Cerberus continues to explore expansion into attractive markets and India falls into that category,” said a spokesperson for Cerberus in an email.

In the first eight months of this calendar year, at least $9.4 bn flowed into India from PE investors

But not everyone is positive about the PE outlook for India.
“One should realise that all the firms present here are investing with funds that were raised in good times. Today, fund-raising is not as easy as it used to be,” said Sanjeev Krishan, executive director at PricewaterhouseCoopers, an audit and consulting firm.
Besides, many private equity investors agreed, deals are not being closed as fast as they used to be. “There is a general deal scarcity, as the investor’s perspective of the valuation and deal terms need to match those of the investee company,” added Krishan.
Given that, and the fact that limited partners such as pension funds, endowments and family offices who invest into PE funds have less of an appetite for private equity, and the absence of ready deals, why are PE firms optimistic?
Harsha Raghavan, head of Candover Investment Plc.’s India office, has the answer: PE funds have raised significant amounts of capital in the last five years, and since they are under no pressure to deploy today, they will continue to seek opportunities in markets such as India if they see potential.
Candover, a European private equity house, has closed transactions worth €46 billion since it was founded in 1980. It set up its India office last month. “Some global PE firms currently have a general sentiment of caution in opening offices in markets they are unfamiliar with, such as India, but Candover does not share this view,” said Raghavan.
Battery Ventures, a Boston-headquarted venture capital firm that is opening its India office by November, is in the same league. “Even in a slowdown, everyone recognizes the intrinsic productivity of India, and economic growth being maintained at levels of 6% and higher,” said Gautam Patel, partner at Battery Ventures, who plans to put in between $5 million and $50 million in Indian companies.
Neither Battery nor Candover are in JM Financial’s list of the largest fund-raisers.
Carlyle Group Llc., Goldman Sachs Group Inc., Texas Pacific Group, Kohlberg Kravis Roberts and Co., Citigroup Venture Capital International, Apax Partners, Blackstone Group, Warburg Pincus Llc., 3i Group Plc., Advent International Corp., Providence Equity Partners Llc., American International Group Inc., and Fortress Capital Investors Llc. are 13 of the top 20 fund-raisers to have established a local presence or invested in India.
An executive at one of these firms, who did not want to be named, said: “There are huge possibilities in emerging markets, including India.
Source: Livemint

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