The amount of private equity investments flowing into once-magnetic India could halve this year as funds face edgy investors, souring portfolios, slowing growth and vendors still reluctant to cut their prices.
TPG managing director Puneet Bhatia says a good part of the PE investments in India over the last two years, as an extended bull run dramatically ended, were fundamentally flawed.
The sustainable private equity deal volumes in this market would be just about 50 percent of the last couple of years," Bhatia said at a PE conference in Mumbai.
India drew private equity investment of $10.7 billion in 2008, according to AVCJ Research, when the stock market fell by more than half. The stock market is down 7 percent in 2009.
PE firms pumped in $17.3 billion into India in 2007, AVCJ said, the final year of a five-year bull run that saw India's main stock index rise six times in value.
Real estate firms DLF and Unitech, wind turbine maker Suzlon, retailer Spencers and Wockhardt Hospitals are among firms looking to raise PE, bankers said.
DLF, India's top real estate developer, has said it wants to raise around $500 million via PE in two months.
But with credit hard to raise as the global downturn bites, PE firms are going to get very choosy in where they invest given it may be sometime before they can sell.
"The markets are shut and will remain shut for some time," Atul Kapur, a managing partner at Future Capital Private Equity, said adding it will take three to five years to exit investments.
With economic growth set to slow to about 7 percent in the fiscal year ending March 31, and lose more steam in 2009/10 after growing at or above 9 percent for the past three fiscal years, PE players see few opportunities emerging in the near term.
The operating environment for Indian firms is going to get tougher and margins are going to be hurt very badly in this downturn, said Ashish Dhawan, a senior managing director at ChrysCapital which manages $2.5 billion in assets.
The best opportunities in 2009 would be 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, industry players 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 has a $300 million India asset recovery fund and has invested $120 million in two firms, including $82 million in low-cost airline SpiceJet.
The number of potentially stressed firms have increased over the last few months. The market cap of such companies has risen to $86 billion as of mid-February from $73 billion as at November, Nabha said.
PE firms say they are also challenged by unrelenting high valuation expectations from company owners.
"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 toward the end of the year. Only then will some dialogue turn into action."