ft.com/alphaville

Even as private equity investment into India surges, a new report suggests the share of pe investment into listed companies in India declined significantly last year [via the Business Standard].

Buyout groups’ investments into publicly traded Indian companies, which accounted for as much as a third of all investments in those companies in 2005, fell to 22 per cent in 2006.

These figures come at a time when there are an estimated 100 private equity funds swarming around for deals, the Business Standard reports, and India is one of the fastest- growing private equity markets in the region.

But despite the record heights reached and generally kept by the stock markets, private equity has begun to spurn India’s listed companies. Why?

One key reason seems to be the market itself, the newspaper said. Returns in India have been among the highest in the emerging market area and fund managers are beginning to book profits, having held on to their current investment portfolios for the last three to five years.

Moreover, as the Indian growth story continues apace, many of the existing buyout firms are looking at fresh rounds of investments. To do that effectively, the report said, it is important for them to show real performance and returns, not just paper profits.

But there are other dampening factors, beyond these obvious trends, the report said:

• The average deal size in India is still small, barring a few exceptions, which will also have an impact on the pe appetite for longer holdings and the scale of returns
• Many Indian businesses are still sceptical of pe funds - most companies continue to finance expansion through debt or new public issues of stock, and even the ones that have partnered pe funds are unwilling to give them more than a relatively small stake.
• Regulatory concerns - pe firms are dealing with a regulatory creep globally, and the Indian government recently launched two separate investigations into deals involving pe groups

Despite the hurdles, India may well continue to attract and hold private equity’s attention. A Bain & Company study estimated that India’s pe market would reach almost $7bn by 2010 - more than triple its present size - and they called that estimate “conservative.” But the study also said pe investments in the country would remain based on the traditionally smaller growth-capital investments.
“Transformational mega-deal buyouts similar to those struck in the US and other mature markets are far more difficult to execute in India,” the report said, citing government limits on access to foreign leverage and the aforementioned reluctance of family-controlled businesses to cede power.FT Alphaville does wonder about all of this - if the private equity players are simultaneously pulling out of public companies and being fended off by family-owned affairs, might they not be tempted to look elsewhere?