Private Equity Invades India

Strong growth and a hot market have foreign investors pouring in billions

Rajeev Gupta is used to living out of a suitcase. The 47-year-old managing director at Carlyle Group in Mumbai spends much of his time crisscrossing India in search of diamonds in the rough—medium-to-large family-owned companies in need of outside capital and management knowhow. "India's attractiveness to private-equity investors is not merely its sizzling economy," says Gupta, who runs the numbers on about a half-dozen deals a month. "Indian companies also have the highest return on equity in Asia." How high? The former banker says it's about 21%, compared with 9% for China, numbers that have spurred Washington-based Carlyle to invest $50 million in Indian businesses ranging from pharmaceuticals to tech consulting.

Carlyle is in good company. India's combination of 8%-plus growth and a roaring stock market is drawing throngs of U.S. and European venture capitalists and private-equity funds. In the past month alone, more than 100 foreign outfits have met with KPMG's newly created private-equity group in Mumbai, says the unit's chief, Vikram Utamsingh. "All kinds of global funds have India on their radar," he says.

The directories of swank office towers in Mumbai, Bangalore, and Delhi read like a who's who of the business: Besides Carlyle, there's Kohlberg Kravis Roberts, Blackstone Group, Warburg Pincus, Texas Pacific, and dozens of others. "It seems like the gold rush is on," says Abhay Havaldar, a managing director at Greenwich (Conn.)-based General Atlantic Partners. In the past four years, his fund has sunk $550 million into seven Indian companies in sectors such as television broadcasting and back-office outsourcing.

The pace of dealmaking is furious. In the first nine months of 2006, India saw 329 venture capital and private-equity investments worth a total of $5.9 billion—more than double the tally for 2005—with some 60% coming from foreign players, according to researcher Venture Intelligence India. The size of deals is growing, too: from around $8 million four years ago to an average of $25 million today. The record for 2006 was set by Idea Cellular, which in November received $950 million from a clutch of investors including Providence Equity Partners, ChrysCapital, Citigroup, and Spinnaker Capital. A new benchmark may be on the horizon: Reliance Communications is in talks with private-equity players such as Blackstone, Texas Pacific, and kkr to fund its $10 billion bid for cellular carrier Hutchison Essar.

It was telecommunications that really ignited interest in India. In 1999, New York-based Warburg Pincus made a $300 million bet on regional carrier Bharti Airtel, which has since grown into the country's biggest cellular company. Over the past few years, Warburg has sold the stake for a total of $1.6 billion, but it hasn't lost its appetite for India. Warburg has pumped $1.4 billion into companies from hotels and media to jewelry, and India today represents 10% of its global portfolio.

In India, as in other fast-growing emerging markets, the distinctions between private equity, venture capital, and other forms of financing are often blurry. If a company resists selling majority control outright, private-equity outfits such as Warburg and Carlyle will often settle for a minority stake, usually between 10% and 30%, in exchange for an infusion of "growth capital." Meanwhile, investors such as Sequoia and Citigroup Venture Capital, which typically finance startups, are plowing money into more established companies.

One of those is Coffee Day. The decade-old chain expects about $100 million in revenues for 2006 and has nearly 1,200 outlets—a mix of cafés, highway convenience shops and retail coffee stores—across India. In July, Sequoia—a Silicon Valley venture fund with $750 million invested in India—poured $20 million into Coffee Day's parent company, a coffee grower and trader with ambitious plans. It hopes to have 2,500 outlets in India by the end of 2007, and expects to boost its presence in Europe, where it has already opened two shops in the heart of café culture, Vienna. "With enough private equity, we are able to pursue our expansion plans aggressively," says Naresh Malhotra, a former head of kpmg India and now managing director at Coffee Day.

With so much money flooding in, some fear a bubble. "The market is overheated," says Carlyle's Gupta. Valuations are spiking ever higher as Indian firms play one suitor against another and potential investors elbow each other out of the way. For instance, Hiranandani Developers, a builder of gated communities and high-end office towers, has gotten offers of as much as $100 million from more than a dozen outfits. "It's crazy the way people are throwing money at deals," says founder Surendra Hiranandani.

One reason investors continue to throw money into India is that it offers a good way to cash out with a profit: its comparatively liquid and transparent stock market. The Bombay Stock Exchange's benchmark Sensex index is up 42% since January, spurred in part by IPOs for 15 private-equity-backed companies that raised a total of $887 million.

Another selling point is an abundance of family-owned companies. Although Indian clans have traditionally been reluctant to give up management control, the younger generation is often prepared to trade away a chunk of the company in exchange for cash and some advice on beefing up sales.


That's how drug researcher Glenn Saldanha hooked up with British investors. Saldanha, who had worked for Eli Lilly & Co. in the U.S., returned to India in 1998 to help run his family's company, a Mumbai-based generics maker called Glenmark Pharmaceuticals Ltd. With an eye toward expanding overseas and boosting research, he took Glenmark public, floating 30% of the company. In 2002 Saldanha accepted a $10.2 million offer from London-based Actis Partners for a 15.4% stake. Under Actis' guidance, Glenmark streamlined its financial systems and launched a search for strategic partners. Revenues for the fiscal year ended in March were up 14% from 2005, to $126 million, while profits climbed more than 6%, to $1.5 million. "The funding put pressure on our management team, which drove us toward this fast and aggressive growth," says the 37-year-old Saldanha.

As India's economy continues to open up, private-equity investors are starting to diversify away from telecommunications and outsourcing. These days, health care, food, real estate, travel, and more are heating up. In addition to Coffee Day, for instance, Sequoia has plowed money into a rental-car company, a hotel chain, and a Web portal that helps arrange marriages. Says Sequoia India chief Sumir Chadha: "Investors are focusing on building companies [that have] Indian demand."

By Nandini Lakshman

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