Chindia, more Chindia

The joint Bain & Co. and Indian Venture Capital and Private Equity Association (IVCA) India Private Equity Report 2010 forecasts investments to rise to $17 billion in the Subcontinent by 2010. This compared to AVCJ Research figures for 1H10, released last week, which already show an almost 65% rise on investments from 1H09, with more than $3.7 billion invested so far this year.

Furthermore, the Bain survey shows buoyant GP optimism, with 27% of the 75+ private equity investors polled saying they will invest $200-500 million in India over the next two years. And some 60% of the poll also expected exits to rise over the next three years by some 25%. So, despite concerns that India is an overcapitalized market with too few opportunities for private equity, especially set against its thriving public markets, deals seem to be getting done and money is going into the ground, and GPs see only better things to come.

So, Asia’s two growth axes seem to be spinning, with China already driving the entire region’s private equity volumes, while India appears ready to complement its regional peer – delivering roughly half China’s almost $8.75 billion of deals in 1H10, but with equally bright prospects. And, as detailed in the macro report this issue, China appears to be successfully transitioning its macroeconomic model from an export-oriented stance to a domestically-driven one, which will drive even more sustained and robust growth across the entire country, with rising wages and more prosperous inland provinces seeing swelling levels of consumer spending and plentiful opportunities for private equity firms to invest the disposable income growth story.

Yet some causes for concern for both markets have emerged almost simultaneously with the latest glittering figures. The rising broadly-based growth of China’s hinterland is offset by falling industrial production and a declining real estate market in the first-tier cities, as well as continuing question marks over the still-important export sector. Worse, China’s stimulus measures that have created the broader consumer-led growth nationwide in 2008-09 have also created what’s generally described as a $1.2 trillion time bomb in China’s financial system, as local goverments’ urban development investment corporations (UDICs) sit on a huge volume of often imperfectly collateralized infrastructure development loans from China’s banks. And the whole transition from an export to a consumer economic model, with attendant urbanization, is bound to bring dislocations and risks.

India, meanwhile, has just had a blunt reminder of continuing regulatory risk with a series of draft proposals tabled for discussion by SEBI, including a requirement for acquirers and investors taking more than 25% of a company to mop up the full 100% of the target’s float. In practice, this may be unworkable. In principle, its motives to protect the smallest retail investors, no matter how laudable, speak volumes about a continuing quasi-socialist approach to regulation and policy-making that held Indian growth to a crawl for decades after independence.

None of the above is likely to give Western investors much pause as they continue to look toward Asia. But, as a source remarked, when the macro curve is heading up and to the right, it is always bound to be a jagged edge. There are going to be dips along the way, and Western investors in both markets, and everything in between, had best be ready for them.

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• Topics
• Greater China
• South Asia
• Performance