In Asia, pvt equity firms prefer India

MUMBAI: Private equity investors cut the largest number of deals in India than any other country in the Asian region. Smaller deal sizes and a large number of deals highlight the high entrepreneurial activity in the country.

In the first eight months of the year till August, private equity firms invested over $4.2 billion, next only to Japan ($6.3bn) and China ($5.3bn). But, the investors cut 178 deals in India compared to 154 in Japan and 144 in China. Last year, during the same period, 85 Indian firms managed to attract $1 billion in private equity investment.

Private equity firms raise money from big investors to buy businesses that have a potential to grow quickly. They often help the managements of the companies they buy by giving loans to grow their businesses and sell their stake later booking huge profits.

A couple of days ago, Rana Talwar’s Sabre Abraaj Capital raised over $300 million from global investors to invest in growth oriented midcap companies with $20-35 million size. Vinod Khosla, Sun Micro-systems co-founder , is evaluating more investments in small tech companies that can help in making fuel additives like ethanol. ICICI Venture recently raised Rs 500 crore to lend to companies that don’t want to dilute equity further.

Says Paul Ferri, founding partner of Matrix Partners: “India is in the take off stage, where there is going to be a lot of opportunity for companies offering services and products for the growing domestic market.” Matrix Partners has set up a $150 million fund to invest in consumer-focused industries mainly in the Internet , telecom and media space.

The surge in investments is despite the fact that valuations of companies in India are expensive compared to rest of the world. In last twelve months, the stock market indices have shot up by over 50%, pulling up stock prices dramatically. This has led to an overall increase in the cost of investing in businesses. Says Sunil Mehta, chairman and CEO of AIG India, one of India’s earlier private equity investors: “The rewards from the promise of a growth story perhaps far outweigh the risk and that is attracting investors into the market.”

Most private equity fund managers say the optimism comes from unbridled growth expected out of regulatory changes. Just like Warburg Pincus invested in Bharti Tele before the mobile telephony boom began, investors expect a lot of stories as sectors like real estate, retailing and infrastructure open up.

Says a fund manager, “There are the big stories and then, there are smaller one which support the big ones. There are many such small companies in India that operate below the radar that we are keen to invest in.” The fund manager has invested some of his $300 million cash pile in companies that provide value-added services to telecom firms rather than investing directly in telecom companies.

Industry experts feel the larger number of deals in India is also representative of the number of opportunities arising in many sectors. As IT and ITeS continue to grow rapidly , so is manufacturing and other knowledge industries like pharma and biotech. Says AIG’s Mehta: “Japan and Australia attracted private equity investors much earlier and their deal sizes are bound to be large. India markets, on the other hand, was closed for a long time.”