Friday Letter Private equity's new centre of the universe

The world is on the edge, proclaims The Economist on its front cover today, and many of its readers will wholeheartedly agree. However, some people are feeling safer than others, thanks to where they are and what they do for a living.

Take private equity professionals in India, for instance: if the prevailing mood at this week’s inaugural Private Equity International India Forum 2008 in Mumbai was anything to go by, turmoil in global markets has not dampened their spirit.

Of course, local general partners are experiencing a slowdown in activity and anticipating challenges in the coming months. But they also cited reasons to be cheerful, including the fact that capital markets in India are still in relatively good shape and that leverage is not a key component of private equity deals in India.

Some credited the country’s strict regulatory regime governing capital flows as having protected it from the effects of the turmoil in the global financial markets. Thus far, the tightness in regulations has worked very well, said Renuka Ramnath, managing director and CEO of ICICI Venture, one of the country’s preeminent firms. However, she also told the more than 300 delegates at the conference that now was the time for regulators to liberalise so that the country could reach its full potential. It was a view shared by many.

To be clear: in private equity terms, reaching the country’s full potential will not mean the development of a fully-fledged buyout culture any time soon. Besides the absence of leverage, another factor limiting the number of control deals is that too many Indian companies are still in growth mode, and that their owners are content to carry on riding the economic wave.

This is also why private investment in public equity was also a big talking point at the event. PIPEs continue to be seen as an attractive investment proposition, despite the fact that PIPEs made in the last two years are not looking great due to the sharp drop in the country’s stock markets this year. GPs speaking at the Forum were adamant that PIPEs would continue – in part because the stock market falls have made asset valuations more realistic, and also because many of the businesses that went public in 2006 and 2007 when raising capital via an IPO was easy are now having to look for funding elsewhere.

So although the word “cautious” was used frequently, optimism prevailed throughout. Luis Miranda, the president and CEO of IDFC Private Equity in Dubai, even described India as becoming “the centre of the universe” for private equity. His comment was made in jest of course. But again, the confidence among those present was palpable.

World turbulence might be at a peak right now, but private equity managers in India are feeling reasonably good about the future.