Are PE Firms Losing Their Taste for India?

MUMBAI (Reuters) – Indian companies are queueing up to tap private equity capital, but a slump in appetite for such investments in the country may upset their plans.

Real estate company DLF Ltd (DLF.BO) and Wockhardt Hospitals plan to raise private equity capital, while property firm Unitech Ltd (UNTE.BO), wind turbine maker Suzlon Energy Ltd (SUZL.BO) and retailer Spencers are also eyeing that route, bankers involved in the negotiations told Reuters. But with credit hard to come by as the global downturn bites, private equity firms are likely to be very choosey about where they invest, given it may be a while before they can sell out.

Their own portfolios have soured and they are facing sellers who are not willing to cut their asking prices.

“The sustainable private equity deal volumes in this market would be about 50 percent of volumes done in the last couple of years,” Puneet Bhatia, managing director of the local operations of U.S. private equity firm TPG [TPG.UL], told a conference in Mumbai last week.

India drew private equity investment of $10.7 billion last year, according to Asian Venture Capital Journal Research, when the stock market fell by more than half. The stock market is down 8.5 percent so far in 2009.

Private equity firms had pumped $17.3 billion into India in 2007, AVCJ said, in the final year of a 5-year bull run that saw the country’s main stock index .BSESN rise six times in value.

DLF, India’s top real estate developer, has said it wants to raise $510 million within the next two months. [ID:nDEL89624]

A Wockhardt Hospitals spokesman confirmed the firm was eyeing that route.

A Suzlon spokesman said the company is looking to raise funds, but would not comment on how. Officials at Spencers and Unitech did not answer several calls seeking comment.

“The markets are shut and will remain shut for some time,” said Atul Kapur, a managing partner at Future Capital Private Equity, adding it will take three to five years more to exit investments.

‘TURNAROUND OPPORTUNITIES’

With economic growth set to slow to about 7 percent in the year to end-March, and lose more steam in 2009/10 after growing 9 percent or more in the past three years, private equity players see fewer opportunities emerging in the near term.

The operating environment for Indian firms is going to get tougher and margins are going to be damaged in the downturn, said Ashish Dhawan, senior managing director at India-focused private equity firm ChrysCapital, which manages $2.5 billion in assets.

China, by comparison, would see continuing growth of private equity investments in 2009, after they rose 8.2 percent to about $13.4 billion last year, analysts said.

In India, the best opportunities in 2009 would be in buying non-core assets or distressed units of large conglomerates, and picking up stakes in non-cyclical sectors focused on domestic consumption, such as consumer goods and infrastructure, some industry executives said.

“This year could create turnaround opportunities in textiles, real estate, auto parts and airlines,” said Ranjeet Nabha, CEO at WL Ross India. The firm runs a $300 million India asset-recovery fund and has invested $120 million in two firms, including $82 million in low-cost airline SpiceJet (SPJT.BO).

High valuation expectations from company owners were also a stumbling block to deals, private equity firms said.

“The pressure points have not reached a point to force large conglomerates,” Heramb Hajarnavis, vice president of principal investment area at Goldman Sachs Group Inc.

“They will have to take a decision probably towards the end of the year. Only then will some dialogue turn into action.”

By Narayanan Somasundaram
(Additional reporting by George Chen in Hong Kong) (Editing by John Mair & Muralikumar Anantharaman)