Private equity funds need level playing field in India to grow

Although 2007 is likely to be another landmark year for private equity (PE) in India, the level of PE activity, currently estimated at around $10 billion, could increase and needs to increase multifold given India’s current GDP growth.

To achieve this, regulations and taxes need to improve and the PE community needs to project itself in the market that it is a source of finance that contributes to the growth plans of entrepreneurs, helps generate employment and improves corporate governance.

Having said this, PE financing is steadily gaining more acceptability amongst Indian promoters. This indicates a ‘leap of faith’ for closely-held traditional Indian family-owned and managed businesses, which until a few years ago, had viewed private equity financing as a possible interference in their business.

The recent investment by Blackstone in Bangalore-based garments company Gokaldas Exports demonstrates this leap of faith. Blackstone has acquired a controlling stake from the owners.

This transaction symbolises a traditional promoter-family run business partnering with a large private equity fund to accelerate its growth plans. This transaction demonstrates that Indian promoters are recognising the value that a PE brings to the partnership and PE investors are being viewed as ‘partners’ to the business.

In the backdrop of increasing competition for deals, some PE funds bring immediate value to Indian promoters at the negotiating table. For example, in the BPO industry, value is brought to the negotiating table by offering to introduce existing US or Europe-based investee companies who could be interested in offshoring, thereby providing an immediate growth opportunity to the Indian business.

Since 2002, PE inflows to India have witnessed a compounded annual growth rate of 67%. PE inflows during the first seven months of 2007 stood at $6 billion, which is already close to surpassing the $7.9 billion invested during the whole of 2006. However, what is more important for

PE is that the past two years have confirmed that the Indian market provides the liquidity to help PEs exit from their investments. Reports suggest that between January 2004 and June 2007, PE and venture capital funds exited 160 companies, 110 through sales and 50 through IPO.

(source: Economic Times)