Whither the Next Wave of Indian PE?

By Cyrus Driver

  • 01 Nov 2010

2010 has been a very busy year, so I hadn't kept in touch with as many people as I would have liked. My fund closed our most recent investment a few weeks ago and I got a bit of a breather before getting started on the next investment. That gave me a chance to catch up with friends in other PE funds and hear what they're up to.

2010 has been a great year for almost everyone. India's PE army is clearly on the march expanding and evolving again after a somber period in 2008-09. Deal activity has risen strongly over the past year, not just in quantity but also in quality. Across deal sizes, funds are seeing better quality businesses raising capital this year. Further, funds that have head offices overseas are basking in the glow of India's growth as their head offices urge them to put more capital to work. Of course, high deal activity in India always comes accompanied by an increase in valuations and getting deals done at "reasonable valuations" is the key challenge this year.

Having survived the financial crisis, India's PE industry is now maturing at a fast pace. The rise of independent funds is something we should all be proud of. Successful fund raises by CX Partners, Ascent, Multiples, Peepul Capital stand testament to the increasing credibility of Indian fund managers. Fund raising can be a grueling challenge in the best of times; and these are not yet the best of times. I doff my hat to the successful fund raisers and wish all luck to the dozens of teams out there trying to raise their first/next fund.

The number of control transactions is clearly on the rise. Growth capital for a minority stake remains the most common transaction in India, but every fund I met had either closed or was working on at least one control transaction. This is a big change from 2 years ago.

A consistent criticism of Indian PE and a challenge to Indian PE funds in their fund raising efforts - has been that LPs have seen limited distributions from this country. Indian PE funds invested billions of dollars in the period 2005-2008 and very little of that had been returned to LPs by end 2009. A booming stock market this year has blunted that criticism. Many PE funded companies have listed this year and PE exits are at record levels. Many funds are readying to raise their next fund in 2011 on the back of the successful exits recorded this year.

I wonder what 2011 will bring. As PE funds try to stay ahead of competition, they are digging deep many are focusing on sectors either through sector-focused funds or sector-focused teams, some are setting up offices in new cities to get a first look at local deals there, many have added operating partners to their rolls to bolster their ability to add value to their portfolio companies. Who will push the envelope further in 2011 and in what direction? Will an Indian fund open an office in another South Asian nation? Will we see the launch of a fund focused on the promising India-Africa corridor? Will an Indian fund break past taboos and attempt the hostile takeover of a mismanaged listed company? Will RBI rules change enough to allow the launch of a genuine mezzanine fund?

There's much to do and much to look forward to. Here's an early toast to 2011.