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Private Equity Makes a Return Visit to India Amid Changing View Toward Asset Class

May 5, 2016

Private equity is showing a resurgence in India as its economy booms, but the rise in deal making reflects more than a stronger business climate and increased consumer spending.

Western firms say Indian family-owned companies have become more receptive to taking foreign capital. Those firms also are stepping in to provide capital when banks aren’t willing to provide it, including buying assets from highly indebted local companies.

Consultant Bain & Co. said sponsor-backed deals in India reached a record $19 billion last year, up from 2014’s $11.4 billion.

“The general economic situation in India and the magnitude of nonperforming loans with the banks are resulting in them putting pressure on borrowers to sell assets, be it power and steel plants, telecom licenses or real estate,” said Rajiv Kochhar, founder and chief executive of advisory firm Avista Advisory Group. “Many of these transactions are very large in size. That’s where private equity and strategics are also selectively coming in for value buys.”

KKR & Co. is one such firm, aiming to be not only a private equity investor but also a senior and junior debt provider.

“We believe that key sectors in the country such as real estate have a large need for capital, yet bank credit is highly regulated, and debt capital markets are challenging,” said Sanjay Nayar, chief executive of KKR India.

KKR last year picked up a 20% stake in polyester maker JBF Industries Ltd. for $150 million through its $3.35 billion KKR Special Situations Fund II LP.

“It was a classic case of a company which does well, has capital and is building to expand its footprint – but for whatever reason, things get delayed and banks are not able to give the last mile financing,” said Mr. Nayar.

Global private equity firms set up outposts in India in the early 2000s, but were held at arm’s length amid a long tradition of keeping businesses within families or seeking capital via the public equities market. Firms couldn’t do much apart from taking minority interests in growth-stage businesses, hoping a rising tide would lift all boats. But mid-decade deals changed the perception of the industry.

“Following a couple of very large transactions in 2006 and 2007, people saw that families could put up assets for sale, get very good value and then use the money to do other business,” said Dhiraj Poddar, TA Associates’ co-head of India. “Now these family businesses see that it’s fine to sell businesses to private equity or strategic players.”

Among those mid-decade deals were TPG’s 2006 investment of about $100 million in Shriram City Union Finance and Apax Partners’ $104 million investment in hospital operator Apollo Hospital Enterprise Ltd. in 2007.

At this point, investors have seen success in a range of industries that provide a path to follow. “Among the largest deals in India in the last 10 years, the IT services, financial services, health care, consumer and manufacturing sectors have received about 60% of the capital deployed,” said Amit Dixit, who co-heads Blackstone Group’s private equity business in India. “However, they have generated 83% of capital gains, so we are seeing a lot of private-equity dollars concentrating in these sectors because they have been good performers and big drivers of private-equity gains.”

Blackstone last month bought Hewlett Packard Enterprise Co.’s majority stake in outsourcing firm Mphasis Ltd. for about $825 million. Together with travel and logistics IT company IBS Software Services Pvt. Ltd. and the business processing outsourcing unit ofSerco Group PLC, Blackstone has committed $1.4 billion in the Indian IT sector. Mr. Dixit said outsourcing companies’ “export-oriented nature gives dollar investors a natural hedge.”

Boston’s TA Associates and India Value Fund Advisors invested $500 million in high-speed broadband service provider Atria Convergence Technologies Pvt. Ltd. as Mr. Poddar said “the fiber-to-home broadband penetration in the country is really low.”

Although a wider variety of opportunities seem to be available to private-equity investors in India, Vivek Pandit, McKinsey & Co.’s Mumbai-based senior partner, said given the short period of courtship with private equity and the small pool of private companies, investing in India is like “fishing in a fairly small pond, [a]growing but small pond.”

Read more at: http://www.wsj.com/articles/private-equity-makes-a-return-visit-to-india-amid-changing-view-toward-asset-class-1462458405

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