Coming of age

The total value of Indian private equity investment has bounced back in 2010, suggesting that much of the financial crisis-related has dissipated. In the first 10 months of 2010, private equity firms have already invested $6.84 billion, more than double the amount invested in the corresponding period last year, according to Venture Intelligence, an Indian private equity-focused research service.

The Indian stock market has rallied almost 20 percent since the beginning of the year and the Bombay Stock Exchange benchmark Sensex reached an all-time high close at 20,893.57 on 4 November, another sign of increasing investor confidence.

Through all of this, there have been changes afoot in the Indian private equity industry and these relate to the size of deals, an emerging segmentation in the market and GPs’ attempts at specialisation.


Anand Sunderji, senior advisor to London-based SB Capital Partners, an investment boutique that works with family offices and other institutions in private equity, underlines why it is still difficult to do control transactions in India. The first reason is that entrepreneurs do not want to lose control over businesses they own. Secondly, many Indian private equity firms do not have the skill sets necessary to run and operate a company. Additionally, the lack of leverage in India inhibits large buyout transactions, he says.

Given the strong growth outlook across multiple sectors in India in the medium term, making minority investments in family-owned and entrepreneur-led businesses will continue to be the viable operating model, says Srinivas Chidambaram, managing director and CEO of Jacob Ballas Capital India, a New Delhi-based manager with more than $600 million under management. The best enterprises fall into this category, he says, and in the absence of any distress or succession issues, there is no economic driver for the best companies in India to surrender shareholding control.

However, the number of control transactions will increase, Chidambaram says, although they will not make up more than 10 percent to 20 percent of the market opportunity in the next five years. “My view is that buyouts and control situations will see a strong emergence, possibly in five to 10 years once growth slows down, some bumps are hit along the economy’s growth cycle and founders of businesses start to exit.”

Anubha Shrivastava, a managing director and head of the Asian portfolio at UK government-backed CDC Group, says private equity managers that were taking minority stakes before the recession are now trying as far as possible to get significantly larger minority stakes in companies and – where possible – control stakes. This is because, as the recession hit, a number of companies were not performing and there were disagreements between the private equity fund managers and the owners. “Fund managers realised they were not as influential as they would have liked to be,” she says.

Singapore-based Sunil Mishra, a principal with fund of funds manager Adams Street Partners, agrees that Indian financial sponsors are now looking for larger stakes and that while some GPs have now raised buyout – rather than growth capital – funds, others are pursuing buyouts on a more opportunistic basis. As a result, the Indian market is witnessing a greater number of investments of more than $100 million size, even if they are not outright buyouts.


In recent months, a number of sector-specific funds have emerged in India, targeting sectors such as healthcare, education and – most commonly – infrastructure. There is a view, however, that the market is not yet ready for funds focused on only a particular sector. Both Adams Street’s Mishra and Low Han Seng, executive director and head of the private equity fund of funds business at Singapore-based United Overseas Bank, do not think the Indian market has enough depth yet to justify sector-focused funds. For one thing, says Low, these areas of specialisation – for example, education, hospitals and retail – tend to be quite well recognised by the industry at large, meaning many sector-agnostic funds participate in these sectors as well.

According to Khan, funds focused on single sectors will evolve, but they need to ensure that investment discipline and judgement is not compromised when the sector gets too frothy, something Low alludes to as well, when he says the advantage of a sector-agnostic fund is its ability to switch sectors if a sector becomes too hot, whilst a specialised fund cannot… “and sectors do get ‘hot’ very quickly in Asia”.

Mishra is not convinced there is any sector in India – apart from infrastructure – that can offer 10 to 15 high quality transactions over a three to four year period for a manager to structure a portfolio on an ongoing basis. Infrastructure is the one sector in which Adams Street is looking at specialist funds, as it is the only one which has shown itself to be relevant and effective, he says.

“The most interesting part is that the few people who have made money in the Indian private equity industry are all still sector-agnostic – that tells you something,” says Mishra.

Rather than tie themselves to any one sector, other funds are focusing on broader investment theses. Shujaat Khan, co-founder and managing director of Mumbai-based Blue River Capital, which will be in the market for its next fund in early 2011, says his firm is now aligning its strategy with “broader target mega-themes,” namely financial inclusion, consumer spending and infrastructure development.


By some estimates, there are now more than 400 private equity fund managers in India today. And new funds continue to be launched each month. However, United Overseas Bank’s Low says that while quantity has increased, quality remains hard to find. In spite of the large number of funds, he says, many overseas institutional investors have only five to 10 relationships and have great difficulty finding quality teams to add to this list.

Sunderji talks about a number of senior professionals starting their own firms. “We are seeing people with track records of 10 to 15 years doing their own thing, but we are not seeing differentiated products,” he adds.

He does, however, say that India is seeing a new breed of managers in the form of funds that are being launched by prominent Indian business families. While these may be subject to some of the complications associated with being a captive investo, there are clear benefits. “These families can bring a lot to the portfolio companies – they can bring business and contacts,” he says.

In a further development, fund managers have started to invest in the central and eastern parts of India, areas that have traditionally not drawn considerable interest. Firms are “venturing outside of their comfort zones” in search of higher returns away from the highly competitive markets of Delhi and Mumbai, “which is good,” Shrivastava says.

Mishra is also pleased with the way the industry is developing in terms of scope. At one point in time, all the funds in India were pretty much the same size, he says. Today, however, there is a distinct small end, mid-end and large end, giving LPs more choices.


A by-product of the expanding market, could well be instability within teams, says Sunderji. With the arrival of international firms and new funds emerging all the time, “What is it that is going to keep these [teams] together, especially in an economy that is changing so rapidly and so many opportunities arise for professionals?” Sunderji asks, recounting a recent anecdote in which someone had switched roles for salary jump of three times.

The proliferation of more funds and firms is also causing concern that too many GPs have been able to raise money without necessarily having the right credentials. In Low’s view, this could lead to a decline in overall industry returns. Thus far, “every man and his dog” was trying to raise a fund on the back of a very limited track record, he says. From here on, there will be a premium for deal sourcing and value creation. Teams with insufficient resources will find themselves being marginalised. “I think that the days of a GP consisting of two men and a dog are fast coming to an end,” Low says.

Consolidation is a recurring theme among market participants. While LP interest in India is likely to remain strong, investors feel there will be a number of managers who will not be able to raise money for follow on funds.

Private equity in India is entering a phase of greater differentiation and segmentation, albeit still within the paradigm of growth capital investing. The biggest development in the market is best summed up by Mishra, who says: “As an LP, I feel we can now construct a portfolio in India, whereas earlier, we were just going after the best manager.”