The financial crisis triggered off the by the US subprime mortgage meltdown, is already impacting Private Equity (PE) investing in North America and Europe. And depending on how our public equity markets react, it will impact the PE scene in India too. But, the nature of the impact is likely to be very different from that in the US and Europe. Because, PE in India is quite different from Private Equity in the Western world.
While (unfortunately) there are many definitions of Private Equity, PE in the US and Europe is commonly used to refer to buyout investments and especially, leveraged buyouts (LBO) which involve taking on significant portions of debt to acquire (often) publicly listed companies – with a view to improving profitability and taking them public again (or selling them off) a few years later.
With the sub-prime crisis raging, PE firms will find it very difficult to access cheap debt from banks – and reports have emerged on how the financing for several mega deals in the US and Europe have been placed on hold.
In India, on the other hand, buyouts (let alone large LBOs) form a very small part of the PE market. Out of the 302 PE investments in India that Venture Intelligence had tracked in 2006, only 14 investments (i.e., less than 5%) were of the buyout variety. And only one of these deals – the KKR-led buyout of Flextronics Software – was valued at over $100 million. Even without including the 22% of PE investments which went to listed companies, an overwhelming 75% off all PE investments in India went into unlisted companies in various stages of their growth.
Given this context, how is the latest financial market turmoil likely to affect PE investments in India? The 2001 downturn had witnessed several global PE investors bidding goodbye to Mumbai. This time around, a key source of strength is that almost 40% of all PE investments in India originates from “India-dedicated funds” – i.e., pools of capital which have been mandated to be invested exclusively in this country.
This means that, even (in the unlikely event) of players like Blackstone and Kleiner Perkins losing appetite for emerging markets investing, there is significant “dry powder” at firms like ChrysCapital and Sequoia Capital India which has to find a home in India over the next few years.
In fact, with less competition from their foreign counterparts (including hedge funds), these India-dedicated funds which have raised their funds recently, would probably be licking their chops to investing in a climate where they could enter companies at attractive valuations compared to what has been possible over the last two years.
Source: Economic Times