Private Equity Pours Into India

A lucrative Warburg Pincus deal sends a signal to other firms: There's big money to be made in India

When private equity fund Warburg Pincus LLC announced on Mar. 14 that it had sold the latest chunk of its stake in India's top cellular player, Bharti Tele-Ventures Ltd., it was the biggest sensation this year for India's markets. Not only was the $560 million sum huge -- the largest stock trade in India's history -- but the deal was completed seamlessly in just 26 minutes. "No one realized the Indian market had so much depth or maturity," says Manisha Girotra, chairman and managing director of UBS India (UBS ), which executed the trade for Warburg. "Or that there was such an appetite for India."

Warburg Pincus has now made $1.1 billion by selling off two-thirds of its 18% share in Bharti -- not a bad payoff on a $300 million investment made in stages between 1999 and 2001. "It was one of the very best deals in the firm's history," says Dalip Pathak, a London partner at Warburg Pincus in charge of Europe and India and the man who led the Bharti investment. "We were willing to take certain risks when we backed the management, and the [risks] paid off."

Warburg's painless and profitable exit sent an important signal to the private equity community: India is finally open for business. Private equity investors from around the world are increasing their bets on Indian corporates or making new ones. That includes big-name U.S. firms like Blackstone Group, Carlyle Group and General Atlantic Partners, and Britain's Actis Partners. Local firms such as ICICI Venture Funds Management Ltd. and Kotak are also stepping up investments. In 2004 these firms poured an estimated $1.3 billion into private equity deals in equity in India, according to Asian Venture Capital Journal.

New foreign buyout firms are arriving monthly, snapping up experienced local staff and setting up shop in Bombay, Bangalore, and New Delhi at a rapid pace -- often hitting the ground running by operating from five-star hotel rooms until they find suitable office space. So far this year there have been 32 deals worth $420 million. And the year has already seen $1.2 billion in divestments, or exits, as they are known in the private equity business. Last year's largest investment came when Greenwich (Conn.)-based General Atlantic and New York's Oak Hill Capital bought 60% of New Delhi outsourcing company GE Capital International Services (GECIS) from General Electric Co. (GE ) for $500 million.

While the traditional route for private equity firms is to buy a controlling stake in struggling, mature corporations and then try to turn them around, in an emerging economy such as India these firms act more like venture capitalists. They look for promising companies in industries ranging from tech to textiles and seek to give them a boost, doing everything from injecting more capital for expansion to holding the hand of management and providing strategic guidance. "Developing countries like India offer [private equity] opportunities that developed countries don't," says Ash Lilani, head of global markets for Silicon Valley Bank in Santa Clara, Calif., which funds the private equity and venture industry. "With the right capital and professional management, private equity players in India can invest early, expand companies, and make an impact on entire industry segments."

Of course, there is also a great deal of money to be made. That's why Blackstone Group recently elevated India to one of its key strategic hubs in Asia. Earlier this year, Blackstone hired several consulting firms, including McKinsey & Co., and looked at investing in various emerging markets. It chose India as the place to set up its next in-country office and intends to invest $1 billion in local companies, says Akhil Gupta, head of Blackstone in India.

India's chief advantage over countries such as China is that it offers investors better trained managers and more corporate transparency in the private sector. It also boasts the oldest stock market in Asia -- the 130-year-old Bombay Stock Exchange -- and the largest number of listed stocks, over 7,000. Most important, the courts are a fairly reliable arbiter of investors' rights. "India is more sophisticated than other Asian markets because of its more developed jurisprudence and relative sanctity of contracts," says Donald Peck, a managing partner in charge of the India office for Britain's Actis, which has successfully enforced a disputed contract.

True, there are significant downsides that still give foreigners pause. For all of its recent financial and regulatory reforms, the country remains mired in bureaucratic red tape and bedeviled by poor infrastructure. Plus, there are limits to foreign ownership in industries such as defense, news media, retail, and some forms of banking. A much-ballyhooed privatization process of state-run firms has been stalled by the current government, so big Indian and foreign private investors cannot exercise control over the juiciest public sector companies.


At the same time, there are plenty of players in emerging industries such as software, tech outsourcing, pharmaceuticals, and pharma outsourcing. And opportunities are expanding in newly deregulating industries such as cellular telecom and broadband, airlines, and port infrastructure. All require not only funding but also outside management and strategic help. While many Indian companies have global ambitions, they are often "not properly channeled," says Shankar Narayanan, head of India operations for Carlyle Group, which has invested $50 million in India since 2003. Players like Carlyle help local companies "scale up and get access to the knowledge and markets they seek," he says.

But all this enthusiasm is new. Warburg's 1999 wager on Bharti, for instance, was initially mocked by those who thought the country would never emerge from the strictures of the license raj. Today, India is the fastest-growing cellular market in the world. Bharti was the first to aggressively expand across India, increasing its customer base to 10 million last year. Bharti's management credits Warburg for supporting its bold plans. "They believed in us a little more than we believed in ourselves," says joint managing director Akhil Gupta (no relation to the Blackstone chief).

Some have placed bets on more traditional businesses. In 2003, for instance, Actis paid $60 million for a 29% stake in state-owned Punjab Tractors, India's most profitable maker of farm tractors and forklifts. Investors expect more opportunities as India develops. "In the next five years the roads will get fixed, the ports sorted out, there will be 200 million mobile subscribers and a huge increase in productivity," says Warburg's Pathak.

Is the Indian market ready to handle such dramatic change? Most dealmakers say yes, noting that the size of their investments has grown steadily larger over the past six years -- from tiny $1 million bets to $500 million buyouts. All that cash sloshing around has some observers worrying about a bubble in Corporate India. But the smart money, according to investors like Pathak, is betting that the best deals are still to be had.

By Manjeet Kripalani in Bombay

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