Businessworld: The New World of Private Equity

Businessworld: The New World of Private Equity - COVER STORY 2006: "$2.3 billion. That’s the quantum of dollars private equity (PE) and venture capital (VC) investors poured into India in 2005. And here’s an even better one — $4.4 billion — the windfall that has come India’s way from these investors in the three years between January 2003 and December 2005. These are just the investment numbers. The overall capital pool available for investment is also significant — investors raised or committed over $3 billion in 2005. In the first six months of 2006, investors have deployed over $3 billion in Indian companies. Experts estimate that by the end of the year, over $6 billion would be invested. In addition, new India-focused funds worth $2 billion are in the pipeline.

So, has India arrived on the global private equity scene?

In terms of sheer numbers, no. India’s investment kitty is barely 6-7 per cent of the global pie. It is not even the biggest investment destination in the Asia Pacific — that position belongs to China, which has roped in over $6 billion in funding in the last three years. Also, while India has made some strides in the PE space, it still has a long way to go in venture capital.

Between 2003 and 2005, PE and VC firms invested $505 billion globally. Of this, VC firms accounted for roughly $100 billion.

In June 2005, 20 per cent of the 545 investors interviewed in the survey plan to increase their global footprint significantly over the next five years. China and India emerged the top emerging PE market destinations in the survey.

The interesting point here is that US investors remain bullish on emerging markets despite returns at home being higher. For instance, according to a recent report by Knowledge@Wharton, the 10-year average PE returns in Europe and the US were 10.9 per cent and 13.8 per cent, respectively. By contrast, returns from emerging markets averaged 3 per cent. But investors reckon that these markets will improve going forward, primarily because of their high industry growth rates. On the other hand, because of the surplus of capital in markets like the US and Europe, and stiff competition among players for fewer deals, valuations are climbing. That makes higher rates of return difficult to achieve in the longer term.

As a consequence, in the last three years, China has seen as many as 40 US VC & PE firms enter the country. India has seen only 12 US VC firms, and mostly through indirect investments — most have first helped their portfolio companies set up back-end R&D operations here and then followed with direct investments. PE firms, on the other hand, have opted for a more direct approach — Carlyle, Blackstone, 3i Capital, General Atlantic and Temasek have set up local offices in India over the last three years. As a result, India today is seen more as a PE market while China is skewed towards VC activity.

While the comparisons with the US market may not be fair — India is an emerging market and the investment dynamics are different — it cannot be disputed that India’s PE industry will have to gradually assume the role that traditional investors play in mature markets: become an agent for transforming businesses. For that to happen, India also needs an equally vibrant VC community. After all, VC is a subset of PE — it creates the companies on which PE eventually places bigger bets. The good news: venture capital is now making a comeback into India.