The world's leading private equity firms are reassessing how they invest in India after racking up huge paper losses buying stakes in listed companies.
Firms have struggled to deploy capital in India in recent years because of the unwillingness of familyrun companies to sell control, and limits on leverage.
The situation led to a huge increase in private investments in public equity, or so-called “Pipe” deals, as private equity firms sought exposure to companies that were among the world's fastest growing.
However, the amount invested in Pipe deals has fallen sharply amid the collapse in company stock prices in the wake of the global financial crisis.
According to Bain & Co, a consultancy, private equity funds invested a total of $1.4bn in 2006, and $3.6bn last year. However, in the year to date aggregate, Pipe investments have totalled $1.4bn.
Investments that have sunk in recent months include Blackstone's $165m investment in Golkaldas Exports, which has delivered a negative absolute return of about 51 per cent as of the end of October, and the group's $150m stake in Nagarjuna Construction, down 69 per cent.
The value of other Pipe investments made over the past 12 months by global groups including Warburg Pincus, Apax Partners and General Atlantic have also fallen sharply.
Sri Rajan, head of the private equity practice of Bain & Co in India, said: “Given the current investment climate, the existing Pipe model has lost favour among private equity funds operating in India. Understandably, firms are now looking to invest in ways that offer them downside protection.”
Senior private equity executives based in Mumbai said they were in discussions over several potential deals as cash-strapped companies sought financing.
However, one said: “Private equity firms will no longer invest in straight public equity. If we do these investments, we want some kind of structured protection.”
A broad range of Indian industries – from infrastructure to real estate – are struggling to raise finances to complete projects or to meet existing obligations following a liquidity squeeze in debt markets.
Private equity could step in by lending money. But they are demanding downside protection in the form of guaranteed returns and additional structures to capture any eventual upside, such as warrants.
But in spite of the Pipe losses, private equity firms appear to remain committed to India and are expecting to step up investments next year as valuations tumble. Mr Rajan added: “There remains a lot of interest in investing in India as valuations have fallen, and when the market settles the deal flow will soon pick up.
“India will remain a largely growth capital market for the near future.”
Indeed, according to Bain & Co, growth stage investments have held up well. They are already totalling $1.15bn in the year to date, compared with $1.5bn for the whole of last year.
Source:FT