Listed Indian companies and private-equity investors are being pushed into each other's arms by the plunge in equity markets and the rising cost of credit.
The marriage of convenience lets private equity funds deploy some of their $20 billion in uninvested capital in liquid holdings at increasingly attractive valuations in a country where buyouts are rare and companies go public early.
More such deals are on the way, with at least $750 million being raised by funds that target listed Indian equities.
"Unfortunately, Indian companies tend to go public much faster, much earlier in the stage of growth. So yes, India is more conducive in terms of public deals," Akhil Gupta, India chairman and managing director for US buyout giant Blackstone Group told the Reuters India Investment Summit.
That means many companies in India looking for late-stage growth capital are already listed.
Washington-based Carlyle Group recently picked up 9 per cent of Indian financial services firm India Infoline, a stake with a market value of about $38 million at the time.
"If you look at the size of the investments we look to make, a lot of the companies we evaluate would end up being in the listed space," said Devinjit Singh, a Mumbai-based managing director at Carlyle.
Private equity investments in listed firms more than doubled in the first nine months of 2011 to $1.34 billion in 44 deals compared to $562 million in 33 deals a year earlier, according to KPMG, outpacing the 31 per cent growth in overall India private equity deals to $7.89 billion in the same period.
Earlier this year, Apollo Global Management LLC invested $500 million in Welspun Group, of which $290 million went into listed Welspun Corp.
In May, International Finance Corp and Kohlberg Kravis Roberts & Co invested $98.25 million in non-banking finance company, Magma Fincorp. In July, the private equity arm of Standard Chartered bought 12 per cent in Redington India for about $98 million.
Private equity investors say listed companies are increasingly attractive relative to unlisted firms, whose controlling shareholders tend to demand valuations that do not reflect the plunge in public markets.
"Why would an investor accept the additional penalty of having no liquidity without some benefit in valuation," said Parag Saxena, founding general partner and chief executive of New Silk Route, an Asia-focused private equity fund.
Indian shares are down 23 per cent in 2011, making them the worst performers in Asia and shutting down the public markets as an option for raising equity capital. Interest rates have surged, meanwhile, after 13 policy rate hikes by the RBI since early 2010.
Public equity investments for private equity firms also allow for easy exits, an attraction when IPO markets have all-but dried up. That's a key motivator in a country where 85 per cent of private equity exits are made through public offers.
For listed companies, bringing in private equity investors provides stable institutional funding, as well as expertise. Carlyle, for example, will be represented on IIFL's board.
More such deals are expected.
In August, WestBridge Capital, set up by four founding partners at the India unit of Sequoia Capital, raised $500 million to invest in listed and later-stage private companies.
Avendus PE Investment Advisors, a unit of Indian financial services firm Avendus Capital, is raising up to $200 million to invest in mid-sized listed firms.
"The fall in equity markets has provided cheaper valuations. You would have probably paid a higher valuation for the same companies a year back," said Manoj Thakur, chief executive at Avendus Private Equity.
Avendus has invested in mid-cap companies such as V-Guard, TTK Prestige and Camline through creeping acquisitions in the open market.
Most Indian companies are small and operate below the radar of institutional coverage, which means private equity firms need to do their homework to find attractive deals and justify the high fees they charge their investors.
Of more than 7,000 listed Indian firms, fewer than 1,000 have access to institutional capital, which makes them hungry for private equity money, said Charles Daugherty, managing partner at Stanwich Advisors, which connects private equity funds and limited partners.
"The opportunity is real and potentially large," he had said in October. "However, the only way PE investment in PIPEs (private investment in public equity) will be supported by institutional investors is if the fund can deliver an increase in sustainable operating value."