India is quickly becoming one of the world’s hottest private equity destinations. Over the last several months a dozen PE firms have revealed plans to raise India-related funds or to invest in the region. Many of them are small, emerging managers, but there are household names in there, too, like The Carlyle Group.
India “is drawing foreign investors like moths to a light bulb,” says Anil Ahuja, CEO of JPMorgan Partners in Singapore. There is a growing understanding that by 2010 India will be the world’s third largest economy and boast a population of more than a billion people, Ahuja says. Recent large and prominent exits in India by General Atlantic Partners, Warburg Pincus and others have also spurred interest in the market, says Brook Entwistle of Goldman Sach’s Private Equity Group.
Viewed from the perspective of the rest of the private equity world, the flow of funds into India is miniscule. VC investments in India, for example, are among the smallest in Asia. They totaled just $37 million in 2004, down from $43 million in 2003.
Right now the private equity story is not about venture capital; it’s about growth capital, PIPES, co-investments and buyouts. Those areas will benefit from the growth of India’s economy, at around 8% per annum, and the appetite of India’s growing middle class of about 200 million people.
Funds of Funds
Not surprisingly, for a country with little private equity infrastructure, one of the areas of growth is among funds of funds. Such firms are expected to provide an extra layer of due diligence for LPs who express more than a little cynicism about India’s nascent PE opportunities.
The first fund of funds dedicated to India-the Evolvence India Fund-was founded in March. Based in New Delhi and Dubai, Evolvence was started with money from the Middle East and India. It didn’t happen overnight. Jay Jaganathan, a GP and founder of the fund, says he spent 18 months meeting with nearly 20 primary fund managers across India before deciding to establish the country’s first FoF. Jaganathan says his firm will invest in fund managers for growth or late-stage companies and that his group will also invest in PIPES and do some co-investing.
And while Jaganathan is the first to admit that his first fund will be a small one (about $250 million), he predicts that the entry of larger international managers will accelerate the pace of developments in the region.
To wit, Adams Street Partners has spent the last several years studying and preparing for its entry into Asia, and plans to open its first Asian office in Singapore this year. Adams Street will invest in Indian managers as part of its Pan-Asian strategy. The fund of funds already has five investments in Asian fund managers (two unannounced). That’s a fraction of the money it has placed in more than 300 private equity partnerships around the world since 1972, but, tellingly, Adams Street has already taken a stake in one of India’s most prominent fund managers, Chrys Capital.
Adams Street isn’t the only U.S.-based firm moving into the market. New Jersey-based Rumson Capital Advisors, an emerging fund of funds, is raising a $150 million to $250 million fund that will invest in China and India. Alex Bangash founded Rumson in 2003 as a funds advisory service for a clientele of educational endowments. He says the firm is already deep into due diligence on fund managers in China and India and has made commitments to several funds. “We’re looking at top-quartile emerging managers,” he says. His plan is to allocate about 40% of Rumson’s capital to India and 60% to China, with 35% of the total going to VC, 45% to buyouts and the remainder to other opportunities. Rumson is leasing offices in Bangalore, India, and Shanghai.
Primary Fund Managers
One of the most encouraging signs for Indian private equity is that fund managers raising new funds for Asia and India are coming back to the marketplace with a history of successful exits in India. Among those raising a second fund is Henderson Private Capital, which is currently marketing its Henderson Asia Pacific Equity Partners (HAPEP) II, a $400 million pan-Asia growth capital fund. Henderson Senior Partner Sanjiv Kapur says that the fund will invest in India, North Asia and ASEAN countries.
Kapur says he’s encouraged by the Indian market partly because Henderson’s first Asian fund (HAPEP I, a $210 million fund established in 2001), has already realized 95% of the capital it invested. Its second fund will make Indian investments from an office in New Delhi run by Vishal Marwaha. Targeted sectors include financial services, health care and manufacturing.
There is a feeling by longtime participants in the market that the time is ripe for new funds. For example, Ajit Dayal has been involved in Indian private equity since the early 1990s as an advisor. His 20-year-old Mumbai-based Quantum Advisors is now raising its first independent private equity fund, with a goal of $100 million to $200 million. It certainly helps that Dayal previously ran a joint venture between Quantum and Jardine Fleming in India that made pre-IPO investments in companies such as Infosys (Nasdaq: INFY), Zee Telefilms (BSE: ZEE.BO) and Mastech (Nasdaq: MAST).
Like Henderson’s Kapur, Dayal describes his new fund as a growth capital fund. Quantum plans to invest between $1 million and $5 million in private Indian companies that need expansion capital. Also like Kapur, Dayal says that the Indian buyouts market is overheating and broadening the auction environment that already exists for the $1 billion funds in the mid-cap market.
Says Dayal: “There is too much money already chasing too few deals” in India’s private equity arena, where Warburg Pincus, Blackstone, Newbridge, Temasek and Carlyle are currently involved in buyouts.
Smaller Is Better
Smaller funds appear to be the vehicle of choice, even for those with years of experience in the market. London-based Actis, among the most experienced investors in India, is in the midst of closing on $300 million for its Actis India Fund II. Donald Peck, head of Actis’s India and South Asia PE funds, oversees a staff of 17 from offices in New Delhi.
Peck says that while Actis may invest as much as $50 million in a deal, the “sweet spot” is deals in the range of $20 million to $25 million. In addition to the Actis India Fund II, the firm is raising Actis South Asia Fund II, which plans to invest about half of its capital in India and the other half in Pakistan, Sri Lanka and Bangladesh.
Peck says that the market has been pretty tough for the past year. His group made only one new investment last year, a management buyout. Other firms were forced into PIPEs, as valuations were too high and too much money was seeking the few deals that were offered, he says.
“However, the active IPO market ended in December, mainly due to global conditions,” Peck says. “Higher oil prices, over-buying [of public equities in India] and interest rate hikes [in the United States].” Those conditions, notes Peck, have brought uncertainties back to the market, so “it’s a good time to do business here.”
China Sees Opportunity
Chinese firms are also growing more interested in India, like Hong Kong-based Baring Private Equity Partners Asia. The focus for the firm’s second fund is on greater China (Taiwan, Hong Kong and China). That accounts for about half of its investments, while India, Korea, Singapore and Malaysia account for the other half. But Baring Chairman and CEO Jean Eric Salata says he expects the balance to shift slightly toward China and India with a third fund, which is in the market looking for $400 million.
“In China and India the large buyout shops have a difficult time finding deals that are big enough, whereas there are hundreds or even thousands of small to medium sized enterprises that provide us with a proprietary deal flow,” Salata says. He has turned over many of the region’s most profitable deals, including one of India’s first buyouts, Emphasis BFL.
Another long-standing Asian PE firm with a growing interest in India is Symphony Capital Partners of Singapore. It was founded by Anil Thadani in 1992 as a joint venture with asset management giant Schroders Plc of the United Kingdom. Symphony is in the market with an Asian mid-market growth and buyout fund that will focus on health care, tourism and consumer companies. It hopes to raise between $350 million and $500 million.
Symphony focuses on mid-market growth capital investing in deal sizes that range from $25 million to $100 million. The firm has thrived in that space, making investments in companies like India’s Blue Dart. The express delivery company recently sold to DHL for about $200 million, earning Symphony a return of 6x to 7x on its original investment.
Navis Capital Partners of Kuala Lumpur is another longtime Asian investor expanding into India. It is closing on its third buyout fund, $300 million Navis Asia Fund IV. Like its predecessors, fund IV will invest across Southeast Asia, but Nicholas Bloy, a founding partner of Navis, says he expects the new fund to invest in India, too, with an office planned for Mumbai this year.
Navis, which is a control investor, works closely with the management of the companies it acquires. Bloy says that Navis avoids investing in sectors with government regulatory involvement, as well as the technology and commodity sectors. The firm made its first investment in India in 2004 with the acquisition of one of the largest airline catering companies in the country.
Not to be excluded, large U.S.-based buyout funds are also eyeballing India. In late May, the Blackstone Group hired Akhil Gupta from Reliance Industries. Blackstone plans to commit $1 billion to buyouts in India.
Meanwhile The Carlyle Group in March hired Shankar Narayanan of Hathway Investments to be its managing director for India. Carlyle plans to commit as much as 30% of its $1.6 billion Asia asset allocation to investments in India.
The moves by Blackstone and Carlyle are a step forward for private equity in India, as they are seen as bellwethers in private equity trends.