Global PE biggies put India story on hold

Number Of Private Equity Cos May Shrink As They Cut Capital Allocated To India Mumbai: "We stay away from places that have impossible governments and impossible tax regimes, which means S ayo n a r ato India," TPG Capital founder-partner David Bonderman said recently, tearing into the country's investment attractiveness. Bonderman, among the most influential private equity (PE) investors, said publicly what his peers quipped behind the scenes: India is possibly the least attractive of the emerging markets for PE, right now.      India's recent regulatory moves on retrospective taxes spooked PE funds, which are long-term risk investors. But it's only a part of the story going awry. Big investors into PE firms like global pension funds, university endowments and family offices — piqued with lower growth, poor corporate governance and bad returns — are cutting back capital allocations for investments in India. This leaves more than 500 PE firms in the country struggling for survival, with the sector bracing for a sudden contraction in the number of funds within 12 to 18 months.      The present count of PE firms is a staggering jump considering India had less than 20 just over a decade ago. PE firms invested $3.98 billion in the first six months of 2012 compared to $5.2 billion in the year-ago period, said a JM Financial note on the industry. The 23% decline by value probably tracked the rupee's drop against the US dollar. But the number of deals remained flat at 185, suggesting the shrinking size of investments.      "Global investor confidence has been shaken badly even as India vies with not China, but Indonesia, Vietnam and South Africa for capital. India's operating business climate always has had challenges, but there was growth. Economic slowdown, which may be lingering for a while, can be unsettling," said Wilfried Aulbur, managing partner, Roland Berger, a global management consulting firm. "Private equity mostly made growth capital investments for minority stakes in Indian companies. They have had little influence on the strong promoter-driven businesses, and hardly managed what they usually do in western markets to improve return on investments," he added.      Few PE firms have made decent profits even though bulge-bracket players like Blackstone Group have a reasonably big portfolio in India. A fund manager who started investing well over a decade ago said most of hisinvestments since 2006 made no profits till date, while a few earlier deals showed returns in 'high teens', or below 20%. Firms like Kohlberg Kravis Roberts & Co (KKR) started NBFCs to extend financing for fixed returns since profits on classic private equity deals are becoming tedious. Incidentally, industry insiders reckon that not more than 200 PE funds are active currently.      "The number of PE firms operating in India shall decline as many would find it tougher to raise a new fund for investments. This would be more in the case of Indiafocused PEs than global firms," said Bhavesh Shah, managing director, JM Financial. Shah said some global firms could realign their emerging markets exposure based on investment attractiveness and portfolio performance. The PE industry is unlikely to see a spate of consolidation moves as M&A in the sector would be need-based and not a trend. "This would mean shutting down of a few firms," he added, while mentioning that India still had fewer funds than China, which is believed to have more than 2000 private equity firms.      Rahul Bhasin of Baring Private Equity Partners said retrospective taxes, combined with bad markets, have distorted investor sentiments about India's PE story. China may have similar woes but investors have seen profits there, he added. Many India-focused PE firms have little cash to deploy, prompting them to hit the market for another fund raise, while in some cases investors behind these funds have put further draw-downs on hold.      "The overwhelming view is that investor performance in India has been sub-optimal at best, raising speculation that many funds may either wind down on-shore operations, or find it increasingly difficult to raise fresh capital. From all our conversations, there is a general belief, and a hope as well, that a contraction of the Indian PE industry is probable and necessary," said Sourabh Chattopadhyay, partner, Wellesley Partners, a pan-Asian placement firm focused on the financial services industry.      Indian PE play peaked with $19 billion investments in 2007 but fell sharply in subsequent years. Private equity investments totalled a little over $10 billion in 2011. The industry, which offers million-dollar jobs to heavy hitters, has over 1,500 people in its fold riding on the lucrative 2:20 (fund managers charge 2% management fees on committed capital and incentive fee of 20% on capital returned) remuneration formula. But, with fresh capital raise getting harder, some are already settling for lower management fees. "There is a growing discussion that the unfolding scenario could see India private equity managers being forced to accept something less favourable than the 2:20 structure," Chattopadhyay added.      "We see fewer funds competing with us for deals in recent days. PEs without a critical mass and no strong engagement with India's long-term story will get out. One can call it shrinking or maturing of the private equity in India," said a managing director at one of the world's largest private equity firms. "And there are people in my firm who think like Bonderman, that we shouldn't be here," he added, while striking a contrarian mood.  LOSING APPEAL äPE firms invested $3.98bn in the first six months of 2012 compared to $5.2bn in the year-ago period  äIndian private equity play peaked with $19bn investments in 2008 but fell sharply in subsequent years  äPE investments totalled $8bn in 2011  äFew PE firms have made decent profits even though bulge-bracket players like Blackstone Group have a reasonably big portfolio in India  äThe number of PE firms investing in India will fall, analysts say ALARM BELLS     We stay away from      places that have impossible governments and impossible tax regimes, which means S a y o n a r a to India  David Bonderman |  FOUNDER, TPG India's operating business climate always has had challenges, but there was growth. Economic slowdown, which may be lingering for a while, can be unsettling  Wilfried Aulbur |  MANAGING PARTNER, ROLAND BERGER