Specialisation will be PE Buzzword in 2008

Numbers are beginning to lose their relevance in the frenetically paced Indian private equity (PE) market.

It is now a given that investments in this market will grow manifold each year and this is likely to continue for the next three to five years, at least.

That investor confidence is only growing stronger is evident not just from the entry of some of the world’s largest PE firms in 2007 – Providence Equity Partners Inc and Apax Partners – but also from the increasing diversification of fund sources.

The US now accounts for about half of the funds flowing in while West Asia, Southeast Asia and Europe are also now significant players.

As the market gets more and more crowded, PE firms find themselves faced with one universal challenge – differentiation of investment strategies.

According to informal industry estimates, there are some 500 PE firms actively investing or preparing to invest in India today. And, this does not include early-stage venture capital firms, who would number less than 30.

Between January and 15 December, PE and venture capital investments (completed and announced) in India stood at US$17.14 billion (Rs67,532 crore) against US$7.8 billion in 2006, according to accounting and business advisory firm Grant Thornton India. Other estimates, mainly in-house research by PE firms that did not want to be named, put total investments in 2007 at more than US$14 billion.

Singapore-headquartered Temasek Holdings Pte Ltd announced deals worth more than US$2 billion in 2007 to emerge as the year’s top deal maker in terms of value. This does not include co-investment deals, including the US$1 billion deal it announced in the last week of December in Bharti Infratel Ltd, alongside Goldman Sachs and other investors. This, incidentally, was Temasek’s second deal with Bharti last year – it earlier picked up a 4.99% stake in Bharti Airtel Ltd for US$1.9 billion. For Temasek, 2007 goes down as a defining year, one which marks the coming of age of the Singapore government-owned firm as a credible dealmaker in the Indian PE market.

Much of the credit for Temasek’s run here last year goes to India chief Manish Kejriwal, a former McKinsey and Co executive who took charge in 2004.

Kejriwal’s role within Temasek is not limited to India, as demonstrated by Temasek’s recent investment in Merrill Lynch on 28 December. As head of Temasek’s Singapore-based banking practice, in addition to his India role, Kejriwal was part of a team that closed the Merrill transaction.

As firms ready for a new investment season in 2008, the overall bullishness is tempered by expectations of intense competition.

Sliced Market

The market is sliced between mega global firms, which command more than US$10 billion each in capital under management, and mid-sized firms that sometimes manage less than US$1 billion.

Firms such as Blackstone Group LLC, The Carlyle Group LLC, General Atlantic LLC, ChrysCapital Investment Advisors and ICICI Venture Funds Management Co, as well as recent entrants such as Apax and Providence, have the appetite for deals upward of US$500 million in India.

Most of these firms will be looking to push through large control deals, such as Blackstone’s acquisition of an 80% stake in Intelenet Global Services Pvt Ltd, or take significant minority stakes in mid-sized companies.

Players in this segment will compete primarily with respect to their focus on similar sectors-infrastructure, banking and financial services, media and entertainment, telecom and real estate.

However, the competition, and the battle to differentiate, will be most intense in the space occupied by mid-sized firms. Out of the 500 firms, at least 400 are in this segment.

Deal sizes pursued by such firms would typically be in the US$50-150 million range. Their sectors or focus would be similar to the larger firms, with some variations.

Take Sage Capital Advisors Pvt Ltd managing director Manish Kanchan’s response to a suggestion from his team to look at the power sector:

“Great, there are 1,000 people like us looking at power,” he says. “So, what are we going to do out there?”

The answer, going by the investment themes articulated by some of the firms Mint spoke to, seems to be to narrow down their focus and specialise.

So, for instance, New York-based Karali Capital Investments LLC will enter in 2008 with a US$250 million fund specifically focused on logistics and supply chain. Sage Capital’s fund will focus on distressed assets.

Askar Capital entered at the end of 2007 with a broad approach, but has partnered with infrastructure company SKIL Infrastructure Ltd.

Some of the impetus to differentiate is also being driven by limited partners (institutions that invest in PE firms).

“I heard the same themes, same ideas and in some cases the same companies,” said Lindel Eakman, managing director of private markets group for University of Texas Investment Management Co at last year’s annual Asian Private Equity and Venture Forum in Mumbai.


This article first appeared in on 1 January 2008.