Private equity hits the accelerator

MUMBAI: Private equity is becoming mainstream. From firms that once invested largely in sunrise sectors such as information technology, media and pharmaceuticals, their bets now extend all over - from textiles to auto components, infrastructure, engineering, telecom, telecom equipment, aviation and manufacturing.

The industry has expanded frenetically in the last one year, with total private equity funds invested in Indian companies more than doubling from what it was 12 months ago. “From $700-1,000 million about a year-and-a-half ago, the capital committed is now around $2 billion on a conservative estimate,” says Amrish Baliga, head of the private capital practice at ICICI Securities.

The pre-2000 investment binge by private equity investors into unlisted companies has been replaced by a keen interest in listed companies. “This is because most private equity investments now are in the range of between $20 million and $50 million, unlike in the past when it was around $5 million. Only listed companies have the size to meet the investor’s needs,” says Nitin Deshmukh, head of private equity at Kotak Mahindra Bank.

One interesting trend, he says, has been that around 90% of private equity placements done in the past two years have been in listed companies, which gives the investor an easier exit option.

Shahzaad Dalal, managing director, IL&FS Investment Managers, a private equity firm, points out that valuations are easier to work out for listed companies since the price discovery has already been done. This makes the investment decision much easier. Listed firms also afford a quicker exit option.

Private equity funds typically inject capital into companies that have the potential to grow, but are short of funds to achieve this growth. In the case of listed entities, private placements are done through preferential issues and not secondary market sales. Most players restrict their investments to below 15%. Beyond that they would have to make an open offer to the other shareholders of the company.

Before 2000, private placements in India were being made by government institutions and banks that had huge investible surpluses.

Though foreign players like ChrysCapital, Citibank, Warburg Pincus, Actis (formerly the Commonwealth Development Corporation), Carlyle, HSBC, Barings and JP Morgan Chase were present in the country, it is only after 2002 that group of professionally organised players from across the globe started looking at India as a hot destination.

With the dotcom bust in 2001, their activity became subdued and picked up only after 2003, when the markets were down and it became an ideal platform for them to invest.
Others foreign players that have become active private equity investors in India include the Blackstone group, Temasek, GW Capital, General Atlantic Partners and 3i Ventures.

In India, the largest private equity firm is ICICI Ventures, with around $600 million of committed capital, followed by IL&FS Investment Managers with around $350 million. Kotak Mahindra Bank has around $200 million, while IDFC has around $180 million.