"Big boys" battle it out in India

Last week, news surfaced that Bain, ChrysCapital, KKR and Warburg Pincus are competing to make a $50-75 million investment in aero-engineering and manufacturing consultancy Quest Global. That same day, news broke that Indian educational platform TutorVista Global has attracted the attention of Baring Private Equity Asia, ICICI Venture, New Enterprise Associates and Singapore's GIC and Temasek Holdings, as well as existing investors such as Lightspeed Ventures and Sequoia Capital, to make a $50 million investment.

Sector by sector growth

Interest in the sectors makes sense, irrespective of the size of the deal. According to local reports, India has seen more than $30 billion worth of airplane and helicopter orders. Founded in 1997, Quest Global currently claims $100 million in yearly revenue, made through the sale of software and services to the likes of Airbus, Boeing, EADS, GE and Rolls Royce – key players in the industry.

As for TutorVista, education and services are also growing industries with opportunities to the tune of $70-80 billion. The company provides online tutoring to a global client base, working with schoolchildren and students in the US.

Playing by new rules

The deals do however represent a departure for some of the global firms: most are unaccustomed to facing such severe competition for mid-cap investments; and most would never consider a deal of this size in any other market. But this could be a sign that international names are coming to understand that India does not play by their rules, and to make money in the market requires a change in criteria.

"Investments of $50-100 million may be considered mid-sized investments by global standards but, unfortunately in India, there's limited availability for large deals, so anything $50-100 million in range is actually large," says Harsha Raghavan, co-founder of Steer Capital.

The larger, international names are understood to be looking at smaller ticket sizes because this is what the market offers and where deal flow may be richest. After many spent time looking for large buyouts that are few and far between, the opportunity set is simply much greater at the lower end of the spectrum.

"In the Indian market, this size seems to be the size where it's easier to get transactions done," says 3i Group's Head of Asia, Anil Ahuja. "If you decide to do $200 million-plus deals, you'll only see a few of those. You don't want to go through the situation where you go a few years without deploying any capital."

But he adds, "This is probably the bottom end and smallest field the big boys should be looking at."  This kind of interest in smaller targets "is uncommon, because in most other markets these players would be seeing this level of competition for deals that are a billion dollars – not even, probably a few billion dollars."

Capital markets as competition

Because IPOs have become such a lucrative capital-raising operation in India, promoters of larger companies rarely see the value of a private equity investor. If a firm were interested in making a large investment in a domestic company, Raghavan says, it is likely that the PE group would see less competition from other firms, and more from a promoter's aspirations to go public. He believes this is in part what is driving the mid-market frenzy.

"These smaller investments are ones that private equity players need to focus on so they're not competing as intensely with the public markets," he says. "This dynamic is forcing the industry to focus on smaller investments, although these operations are more limited." 

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• Topics
• South Asia
• Sequoia Capital
• GIC Private
• New Enterprise Associates
• Baring Private Equity Asia
• ICICI Venture Funds Management Company
• KKR
• Bain Capital Asia