Surge in Indian PE deal mkt attracts new foreign players

While not exactly on this degree, but there are parallels to this story in India. The surge in Indian PE/VC deal market in the past 24 months has attracted many new foreign players.

Most PE or VC firms, which arrived in India in past 12 months, are perhaps finding the going a little tough. There seem to be quite a few firms which have done no deals yet, or at best one or two deals in say 12 months of being active in India. In other words, many of these firms are as yet finding their way around in the Indian markets.

A look at the data would also give some indication. In the first quarter of 2008 (Jan-Mar), private equity firms invested about $3.3 billion in 97 deals according to Venture Intelligence. In Jan-Mar 2007, there were 101 deals. So while the number of PE firms is perhaps up 15-20% in the same period, the number of deals going around is roughly the same.

The learning here is simple — traditional PE models which apply in say, US or Europe, may not always work in India. For example, it is hard to do large deals in India, for more than one reasons — supply remains low, consequently valuations are often an issue. Deals like buyouts are still harder.

In January-March ’08, there were perhaps 5-6 deals greater than $100 million, if you ignore real estate SPV kind of deals. There was perhaps only one buyout, if you count Paras, where Actis has reportedly upped its stake to 60%. So if you are a PE firm keen on large deals or majority ownership, what do you do?

While one answer would simply be — bide your time, be content do none or one deal a year if you don’t get the right deal and right valuations, and don’t bother about opening a local office. The other may be to try a different route of ownership — incubate firms which can quickly grow to reasonable size. In an economy like India, which will grow in the range of 7-10% over 1-2 decades, it may be possible to build multi-billion dollar businesses from scratch. So if you can't buy it, build it.

The recent IPL franchise auction was one area for PE funds to get in at start-up and build a large operation ground up. Recent reports have indicated that winners of IPL franchises are being chased by PE funds. Some deals will surely be announced in the coming months. Yet, the price at which any investment will happen now will be vastly different now. Consider this scenario — a PE investor puts together a team of operating types and enters at bidding stage itself. The potential for wealth creation would be far greater in this route.

The recent auctioning for telecom licences that saw groups like Videocon, Unitech and dozens of other apply, was another example. Many of the new applicants are essentially acting as investors — they are in it more for capital gains, than to build and earn operating income. Their aim is to get the licence and offload equity to actual operating companies, multiply valuations by getting PE investors in and exit at some point with hefty capital gains. In telecom infrastructure business, there is an example of company being built ground up by a PE investor, with majority ownership.

An example of building rapid value in a short period of time is Lemon Tree Hotels, which started by a first generation entrepreneur in 2002. Last week, saw Shinsei Bank and Kotak's PE arm pay $30 million for a 5.9% stake. This values the company at $500 million, or around Rs 2,000 crore.

This appears to makes Lemon Tree the third most valuable hotel company in India, behind only the Tata-owned Indian Hotels, with a market cap of around Rs 8,000 crore or around $2,000 million, and East India Hotels, with a market cap of Rs 5,500 crore roughly $1,350 million. Much older hotel chain Hotel Leela Venture is valued at $380 million and Asian Hotels at $280 million.