Fortune Magazine) — India has never rolled out the welcome mat for foreign companies. Red tape, restrictions on ownership and other barriers have made it difficult for banks, retail giants and media companies to gain a foothold in one of the world's fastest-growing economies. But when it comes to foreign private equity, that's another story.
Indeed, the door is wide open: Foreign private-equity investments in Indian companies doubled to $2.2 billion in 2005 from the previous year, then increased in the first nine months of 2006 to $5.4 billion, according to industry newsletter Venture Intelligence.
And unlike South Korea and Japan, where foreign private-equity groups have been castigated as “vultures,” they have been embraced in India – even after scoring big profits, as TPG Newbridge did last year when it netted $260 million selling its stake in Matrix Laboratories to U.S. generics giant Mylan Laboratories (Charts).
“There's a far more mature and benevolent environment for private equity in India,” says Leo Puri, director of McKinsey & Co. in India. “Unlike East Asia, there has historically been no distress associated with the involvement of private equity in India.”
At first, foreign private equity chased India's IT and outsourcing boom. But now the opportunities are far broader, involving everything from finance to pharmaceuticals. Rising corporate profitability – the profits of listed companies have been growing 20 to 30 percent annually – has been drawing some of the biggest names in the industry.
And although the average deal size in 2005 was only $21 million, compared with $163 million in South Korea, the investments are getting larger. Last April, TPG Newbridge put $100 million into Shriram, making it one of the largest and best-capitalized truck-finance companies in India.
In October, Providence Equity Partners, another U.S. private-equity firm, bought nearly 16 percent of Idea Cellular, an Indian wireless company, for about $400 million. Singapore's government-owned Temasek Holdings has also invested heavily, buying a 9.9 percent stake in Tata Teleservices for about $300 million, the first time the $21.9 billion Tata Group has brought in a private-equity investor.
Other big players include Warburg Pincus, which racked up the largest profit on a private-equity investment in India when it sold most of its 18 percent stake in Bharti Airtel, the country's leading mobile-phone company, for $1.8 billion in 2005, six times what it paid seven years earlier.
Hong Kong's Baring Private Equity didn't do badly either, multiplying by 14 times its initial investment in MphasiS, a Bangalore back-office-services company, which it sold to EDS (Charts) last June.
And American firm Kohlberg Kravis Roberts hopes to score big with its $900 million takeover in September of Flextronics Software Development, a division of California's Flextronics International (Charts), whose operations are mostly in India.
Private-equity firms have been snaring top talent as well. Vivek Paul left his role as vice chairman of IT services giant Wipro (Charts) in 2005 to join Texas Pacific Group. That same year a former top Merrill Lynch (Charts) executive in India, Rajeev Gupta, was poached by the Carlyle Group to run its India buyouts practice, and Blackstone plucked a top advisor, Akhil Gupta, from Reliance Industries (Charts).
Blackstone is reportedly partnering with Texas Pacific and Reliance Communications in an $18 billion bid to buy Hutchison Essar, one of India's largest mobile-phone companies, which is majority owned by Hutchison Whampoa of Hong Kong.
Foreign funds have also made money on the Bombay Stock Exchange, where the Sensitive index has climbed from 3,000 to more than 13,000 in less than four years.
Manish Kejriwal, who runs India Temasek Holdings Advisors, says his firm has made as much money buying undervalued stocks from the public markets as it has from some of its large private-equity bets in India. “It's difficult for private-equity firms to have done badly in this market,” says Abhay Havaldar, managing director of General Atlantic in India, another big private-equity player.
But the easy money may have already been made, and the environment for private-equity firms is likely to get tougher. “Many firms that are potential investments for private-equity funds are going to the public markets, which offer higher valuations,” says Balaji Rao, managing director of Starwood Capital Group, a Connecticut fund that recently set up shop in India.
Neeraj Bhargava, CEO of Warburg Pincus – funded WNS Group, one of India's top companies for outsourcing business processes, agrees. He says some of the new wave of funds coming into India may not have long-term, growth-building horizons and instead may be after quick money.
Investment periods could get shorter as funds look to flip investments rather than build up companies – and that could risk tarnishing the halo currently around private equity. But right now, with India's economy on a roll and growth projections being steadily revised upward, there seems to be plenty of hay to be made.