India emergent

Although it remains behind China on many benchmarks, and still arguably punches below its weight both economically and internationally, India still appears to be coming up from behind to take on its own mantle and bids fair to graduate from medium-sized regional power to economic superpower.

India’s private equity industry to a large extent reflects this. Comparisons between the Indian and Chinese PE environments are surprisingly uncommon, but a few rule-of-thumb observations suggest that India is still considerably less mature as a private equity ecosystem than China, despite its 400 or so firms and well-developed public capital markets. Partly this is a question of timing and the level of attention that India has received from the international firms, which tends to accelerate domestic development. As of 1H10, China had $7.5 billion of new funds raised for the market; India in contrast only had just over $1.48 billion.

Some developments and predictions point to a growing stratification of the market. According to this thesis, Indian opportunities are going to separate increasingly in size bands in the near future. Partly, this is a consequence of some promoters actually being ready to sell the family business, enabling real control buyouts. Hitherto little seen in India, this trend is driven mostly by generational change as industries mature, with promoter families’ second or third generations going to schools in the West, moving out of the family business, and allowing GPs to step in and take the companies over from retiring founders. Also, as already seen in some cases, larger Indian groups are getting progressively more acquisitive internationally. Some will be looking to partner with PE to help provide a link into the international marketplace. Their Western peers, meanwhile, may be looking for equivalent partnership in their passage to India, to access distribution networks, customer bases, and the other key networks needed to capitalize on the fast-growing consumer economy.

The break point for this stratification, according to the thesis, will be around the $50 million per deal level. Local GPs will focus below this ceiling, on deals in the $10-50 million range. To succeed in this space, the local firms will need to take full advantage of their on-the-ground connections to target the highly fragmented, but also high-growth, Indian SMEs. Meanwhile, the Indian divisions of international firms and the biggest local firms will concentrate on deals of $75 million or above, whether succession-driven control buyouts or expansion capital support of major groups. Here, firms will look to differentiate themselves through their international networks, and their ability to help a company step up to the next level of corporate development.

This transformation will probably take place over the next five years. At the end of it, India will have a private equity market more mature and appropriate to the size of the economy and its future potential. Whether it will gain ground in the contest with the public markets, meanwhile, remains to be seen.

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• Topics
• South Asia
• Performance
• Funds