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India Inc looks to private equity

Sangita Shah

Private equity, or private investments directly subscribing to a company's equity, is set to emerge as the leading source of funds for firms in the current year.

Several companies are in talks with investment bankers to arrange for private equity to fund their merger-and-acquisition needs and their bids for state-owned enterprises.

Scores of small and medium-sized firms were also negotiating with foreign private equity funds to raise cash for expansion and survival, investment bank officials said.

At least $1 billion is expected to be invested through the private equity route this year, up from $550 million in 2001 and $450 million in 2000, says Satish Mandhana, director of CDC Capital Partners.

The last time private equity fund activity soared to a comparable scale was in 1994-95.

However, the current movement is marked by the presence of foreign private equity funds and more detailed due diligence exercises.

In 1994-95, merchant bankers were seen courting companies. Now, companies are wooing the funds. But deals are still being brokered by out-of-business merchant bankers.

The number of private equity deals struck this year is not known, but Mandhana expects it to rise sharply from the 18 deals last year and 15 deals in 2000.

The senior vice-president of a leading investment bank, not wishing to be identified, said: "More deals are likely to materialise in the coming months because firms have no options of raising money. They are already over-leveraged on their current equity."

One outcome is that several new private equity funds are poised to enter the country.

A few have already set up shop here. Foreign private equity funds picking up equity include the Washington-based International Equity Partners, the private equity funds of foreign banks like ING Barings, the US-based Donaldson Lufkins & Generette-Alliance and George Soros' Indocean Fund which do not have a presence in India.

CDC Capital Partners has till now invested more than $400 million in Housing Development Finance Corporation, Infrastructural Development Finance Corporation, UTI Bank, Satyam Infoway, BPL Communications and Ortel Communications.

Newbridge Capital, the US-based private equity fund, recently launched its Indian operations with an initial corpus of more than $700 million.

The fund is looking to invest in the financial services, banking, technology and telecommunications sectors.

"The privatisation of public sector units presents interesting investment opportunities," Puneet Bhatia, Newbridge's country head, had earlier pointed out.

"Private equity investments are made in diverse sectors such as business process outsourcing, telecommunications, cement, banking and pharmaceuticals," Mandhana pointed out.

Fuelling the private equity fund rush is the government's divestment programme.

Indian firms need money to bid for stakes in government-owned companies that are up for divestment.

Several companies have also resorted to buybacks and open offers, and are eyeing mergers and acquisitions. Some, with plans for initial public offers, are of the opinion that they will have to wait till the IPO market picks up. For them, private equity is the short-term answer.

Moreover, the private placement market died after the Securities and Exchange Board of India clamped a three-year lock-in for hawking equity.

Companies wanting to list overseas see scope in inducting private equity funds.

"Empirical research abroad shows that private equity-funded firms enjoy higher private equity multiples at listing than their contemporary, non-private equity-funded ones," Mandhana said.

Private equity funds are risk-conscious and so companies funded by them are widely perceived to be safe bets.

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