Private equity funds could earn returns of over 20 percent from investments made in India during the current market downturn, though deals done over the past two years would struggle, a prominent fund manager said on Friday.

Hot sectors for private equity (PE) funds this year include consumer-related businesses, pharmaceuticals and financial services, while real estate and infrastructure sectors, which attracted large capital in boom years, would take a back seat, Ashish Dhawan, senior managing director of ChrysCapital, told Reuters in an interview.

Dhawan, who helps manage about $2.5 billion in assets, does not expect bankruptcies among Indian companies backed by private equity funds. "Deals that are underwritten in late 2009 and 2010, returns ought to be good because valuations would be lower," Dhawan said.

"One can expect 20 percent plus return on deals done in the down market. The challenge will be for deals done in 2007/2008, and there, if you ask me, the median returns are probably zero or slightly positive," he added.

ChrysCapital is an independent, India focused private equity firm which has made over 45 investments since starting in 1999. Dhawan, who is based in New Delhi, was attending a private equity conference in Sydney.

Private equity deals in India totalled $10.7 billion last year, according to Asian Venture Capital Journal Research, less than the $17.3 billion invested 2007. Analysts expect the flows to decline to $5-$7 billion this year. But Dhawan is hopeful about recovery.

"My sense is we will start to see activity pick up in the second-half of this year and 2010. Volumes will be much lower than what they were in 2007 and 2008," he added.

Dhawan expects consumer-driven businesses, pharmaceuticals and financial services to attract capital. 

"These industries will attract capital in the coming months," Dhawan said. "Unlike the western world, the Indian consumer is not impacted, it's exports and industrial production that really have been impacted," he said.

ChrysCapital is sitting on about $1 billion in cash which it plans to deploy over the next three years. Its portfolio companies include Axis Bank Ltd, a private sector bank, Moser Baer Ltd, an optical storage devices maker, Idea Cellular, a telecommunications company.

Unlike the developed markets, buyouts make up less than 10 percent of the total private equity deals in India. Many private equity funds also buy stakes in listed companies, as is evident from ChrysCapital's portfolio.

Dhawan sees Indian private equity funds weathering the credit crisis reasonably well since PE funds in the country generally provide capital for expansion and do not rely on debt-funded acquisitions for returns.

"There is no stress in that I don't expect companies to blow up. We will have some companies which should plod along and then getting out of that investment is going to be challenging," he added.

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