Private equity makes inroads in India

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Private equity makes inroads in India

Private equity is gaining greater acceptance in India where rising borrowing costs and a tanking stock market have shut down other means of funding, forcing family-owned businesses to tap a source they had once shunned.

"It's a question of survival now," said Vishal Sharma, chief executive of Tuscan Ventures, a private equity firm focused on logistics, which has closed three deals in the past year.

Indian companies have in recent years embarked on ambitious expansion plans, bolstered by plentiful cash and low interest rates as the economy grew nearly 9 per cent annually.

But a global credit crunch and soaring commodity prices have taken a toll of late. Inflation has climbed to its highest in more than 13 years, driving interest rates to seven-year peaks. Economic growth is expected to moderate this year, while the stock market has fallen nearly 30 per cent in 2008, beating down company valuations.

"The tough times are forcing firms to evaluate their business plans and look for help to ride out the storm," Sharma said.

Private equity investing in India and China held steady in the first half of the year, the Asia Venture Capital Journal said, with India seeing a 3.2 per cent rise to $6.8 billion, and China registering a 3 per cent gain to $5.8 billion.

Indian private equity deals typically involve little leverage, and private equity (PE) firms have often done growth capital deals and late-stage investments, buying small stakes in private and listed firms.

Still, private equity firms have had a tough time convincing family-owned businesses to surrender some control in return for cash, especially as a six-year bull run meant these companies could get generous valuations from the stock market.

With easy IPOs a thing of the past, firms are coming around.

"When the markets recover, firms will choose to tap the market again, but they may now also go to PE, as they are recognising the value-add that PE brings," said Arun Natarajan, chief executive of research firm Venture Intelligence.

Emerging markets' share of private equity deals this year may go beyond the 10 per cent it got in 2007, or about $57 billion, according to London-based Emerging Markets Venture Capital Association.

SMART MONEY

Indian family-owned firms tend to be sprawling entities with diversified interests and lacking clear succession plans, which makes smaller firms particularly vulnerable at this time.

"Even speaking to a private equity firm was unheard of a couple of years ago for a family-owned business," Natarajan said.