When The Blackstone Group unveiled its first deal in India in July this year – around one year after the firm had established a new Mumbai office – a few eyebrows were no doubt raised. For those expecting the New York-based alternative assets giant to provide a kick-start to the Indian leveraged buyout industry, the modest $50 million (€39 million) investment in Pune-based Emcure Pharmaceuticals must have come as something of a disappointment.

But as a new report from global management consultant Bain & Company confirms, the deal was entirely in keeping with the nature of Indian private equity.

Bain's India Private Equity Outlook report finds plenty of room for optimism on behalf of private equity practitioners in the country, with total deal volume predicted to rise from $2 billion last year to nearly $7 billion in 2010.

However, the fruits of this growth will not be enjoyed by all types of general partner. Bain predicts that the market “will remain based on traditionally smaller growth capital investments.”

There are a number of reasons why buyouts – and particularly large buyouts – have remained a rare phenomenon in India. One is the problem of accessing leverage. Domestic banks have to apply to the Reserve Bank of India to be allowed to participate in such deals, while obtaining debt from external sources involves the time-consuming and costly establishment of offshore vehicles.

Equally, there has been little in the way of suitable deal flow for LBO funds, in part because the privatisation of state-owned assets has as yet failed to gather any significant momentum.

Those assets that do make it onto private equity's radar screens are mostly family owned businesses that have operated in an economy largely closed to foreign investment until recent years.

Because of this, it is unsurprising to find that these family owners are for the most part reluctant to cede majority control to outsiders.

At the same time, attitudes towards private equity are changing for the better as the Indian economy gradually opens itself up to global competition. Owners with ambition to grow their firms globally realise that the expertise, networks and deal sourcing abilities of private equity firms can greatly enhance their prospects of success in the wider world.

Such trends, of course, appeal greatly to growth capital investors, given their willingness to take a minority stake while exerting what the report describes as “quiet influence” in the form of value-creating insights and recommendations.

Bain also highlights that demographic developments are working in favour of investors. An increasingly affluent consumer class with growing demand for goods and services is emerging. Healthcare, for example, has been at the forefront of this trend. In addition to Blackstone's investment in Emcure, UK-based emerging market investor Actis last month agreed to commit $42 million to fund the expansion of Ahmedabad-headquartered over-the-counter business Paras Pharmaceuticals.

Both Blackstone and Actis have presumably had their faith in healthcare buoyed by the news that pan-Asian investor TPG-Newbridge and Singapore's Temasek Holdings are reportedly poised to deliver a near-100 percent IRR from their joint 2004 investment in Secunderabad-based generics business Matrix Laboratories, which is currently undergoing a sale to Mylan Laboratories of the US in a deal worth around $736 million.

And it's not just service industries generating optimism within the investor community. According to the report, the technology skills that underpinned the rapid rise of India in a global economic context (demonstrated most vividly perhaps within the business process outsourcing sector), are now also being applied to manufacturing. In auto components, for example, India has shown itself capable of making its mark in a highly competitive arena. The recent $33 million investment in auto component maker Endurance Technologies by Standard Chartered Private Equity bears witness to this.

It would be remiss to fail to note some of the challenges of investing in India that the report also alludes to. High asset valuations fuelled in part by a buoyant stock market mean that those seeking bargains might be disappointed; whilst a lack of hard data (with respect to industry metrics rather than individual companies) makes India more opaque than some Western markets.

However, it is clear that India is best characterised as an established and flourishing growth capital market. As for buyouts, the report offers a glimmer of hope by mentioning that opposition towards change of control “may be starting to diminish”. But such deals are unlikely to transform the Indian private equity market for a while yet.