By :Pratibha Singh, MBA- II, Finance, SIBM
Last March, when the international private equity firm Warburg Pincus sold a $560 million stake in Bharti Tele-Ventures, India's largest publicly traded mobile telephony company, it created ripples both within the country as well as among private-equity investors across the globe. Not only was the transaction, on the Bombay Stock Exchange, the largest block trade ever on the Indian market, but was also carried out smoothly in less than half an hour, pointing to the depth and maturity of the Indian equity markets.
Over several months Warburg reduced its 18.5% stake in Bharti to about 6%. It invested nearly $300 million in Bharti in the period 1999-2001 and by selling nearly two-thirds of its share, earned a whopping profit of $800 million. When Warburg had entered the market Bharti had around 100000 subscribers, the figure stands at over 14 million today. Bharti’s market capitalization back then was a mere $100 million as against $15 billion towards the end of the period in view. Warburg is the largest private equity investor in India having ploughed $811million into the country as of last year. What is interesting is that the figure is more than double the amount the firm has invested in China- $362 million. Moreover, the Bharti deal is just the tip of the ice berg of private equity investing in India- with the sector holding great promises especially in view of long term investment.
What really set the ball rolling? It is to be noted that a decade ago, while money from US investors did go to Asia, it was to countries like Thailand and Indonesia. The Indian market was still considered to be in its infancy stage and did not figure in any major way. The 1991 crisis that brought the country to the brink of bankruptcy spearheaded an era of reforms, both political and economic that has continued ever since. Although the process of reforms may have slowed down in some cases, it nevertheless has moved on in the right direction. These, as well as sociological changes, both within India and abroad have culminated in developments that are exciting private equity investors the world over.
Factors favoring private equity investment
India’s democratic government and a free press that is rooting out corruption provide it a favourable investment climate especially in the long term. GDP has grown at rates between 6.5-8% over the last few years, a rate not seen in any developing country. Furthermore, the volatility of the Indian rupee has been curbed and inflation has declined implying lower interest rates. Thus equity markets seem to be a preferred investment. Since October 2004 the Sensex has been on the rise. Although it did witness a fall towards the middle of this year, the Sensex has recovered and in fact crossed the 12,000 mark a few days ago.
Globalization has played a key role with most production work shifting to countries like India and China. As a result there is a shift in consumption globally from the developed to developing and underdeveloped world. It is in these nations that one is witnessing a growing middle class that will take up a major share of the world’s total consumption in the years to come.
Removal of restrictions on Foreign Direct Investment (FDI) has added further impetus, the most noteworthy being the change in the retail sector where outside firms selling a single brand such as Nike are allowed to own a majority stake in Indian stores. The limit on FDI for development of airports, mining of diamonds and precious stones and power trading has also been lifted. Foreign Institutional Investment (FII) has boomed over the last couple of years.
One of the biggest changes has been in the confidence level of the Indian people. The contribution of the Indian IT companies to averting a worldwide Y2K meltdown was a major factor in this regard. It saw Indian IT companies going global and the government- unfamiliar with IT- having nothing to do with it. The result being all companies wanting to break away from government regulations.
Moreover, India has an advantage in healthcare including biotech, pharmaceuticals and telemedicine over its Asian counterparts. These are important sectors for a developing economy.
The Current Scenario
A look at Warburg’s other notable holdings in India throws light on the market scenario today. These include- Rediff Communication, Gujarat Ambuja Cement, Sintex Industries, Kotak Mahindra, Nicholas Piramal and WNS Global Services. As can be seen the firm has stuck to big, trusted stock market listed companies. This throws light on an interesting finding that unlike the US where this is rarely a strategy for a private equity investor, India with its demands of a billion people yet to be fulfilled, leaves enough room for even the largest conglomerates to grow. Moreover bigger Indian companies are increasingly seeking capital abroad to expand and thus will never play foul, making them less risky and hence the preferred choice for private equity investors.
As news of the Indian markets has spread, competition has increased and significant names in the private equity world can now be seen operating in India. These include Intel Capital, Oak Hill Capital Management, the Carlyle Group, Citigroup, General Atlantic Partners, CSFB Private Equity and CALPers among others. However most have invested only in double digits so far. A large number of Indian financial institutions like Kotak have created venture funds to tap the sector’s potential. So much so that fund managers expect returns of 20-30% a year.
India’s requirement for capital will continue for quite some time. Infrastructure improvement alone in the form of better roadways, more power generation, etc will require approximately $20-25 million in the form of investments every year. The biggest challenge is to lift nearly 200 million people out of abject poverty. Infrastructure, more than any other medium, has the potential to generate the jobs needed to attain this social goal.
The Stumbling Blocks
A major drawback is that concerning property rights. While the Indian legal system does offer protection of property rights, it does not do so with great speed.
Banking and finance is a critical concern for private equity investors in India , although the future of banking does appear optimistic. With a large number of foreign players, there would inadvertently be pressure on local players to be proactive.
Exit options are another stumbling block. Indian companies are more strongly linked to US firms than their Asian counterparts. Investors in these firms can exit through a US sale or initial public offering. While it’s easy to invest in India, it can be difficult to exit. The public markets lack liquidity and many companies are thinly traded in markets controlled by powerful local brokerages. The Warburg- Bharti case proved to be an exception though.
It is clear that private equity presents a huge potential for investment, more so in an emerging market like India. With reforms in place and the economy zooming ahead, the timing is appropriate. However what needs to be realized is that the key to successful private equity investment depends less on what happens in the financial capitals of the world than in developing villages. It depends on how quickly the internal market will develop. With a rapidly emerging middle class, hundreds of millions of people who will seek to have the same standard of living as everyone else in the world shall enter the picture. The sooner this is understood, the more beneficial will it be- for both the investor as well as the nation.
Last March, when the international private equity firm Warburg Pincus sold a $560 million stake in Bharti Tele-Ventures, India's largest publicly traded mobile telephony company, it created ripples both within the country as well as among private-equity investors across the globe. Not only was the transaction, on the Bombay Stock Exchange, the largest block trade ever on the Indian market, but was also carried out smoothly in less than half an hour, pointing to the depth and maturity of the Indian equity markets.
Over several months Warburg reduced its 18.5% stake in Bharti to about 6%. It invested nearly $300 million in Bharti in the period 1999-2001 and by selling nearly two-thirds of its share, earned a whopping profit of $800 million. When Warburg had entered the market Bharti had around 100000 subscribers, the figure stands at over 14 million today. Bharti’s market capitalization back then was a mere $100 million as against $15 billion towards the end of the period in view. Warburg is the largest private equity investor in India having ploughed $811million into the country as of last year. What is interesting is that the figure is more than double the amount the firm has invested in China- $362 million. Moreover, the Bharti deal is just the tip of the ice berg of private equity investing in India- with the sector holding great promises especially in view of long term investment.
What really set the ball rolling? It is to be noted that a decade ago, while money from US investors did go to Asia, it was to countries like Thailand and Indonesia. The Indian market was still considered to be in its infancy stage and did not figure in any major way. The 1991 crisis that brought the country to the brink of bankruptcy spearheaded an era of reforms, both political and economic that has continued ever since. Although the process of reforms may have slowed down in some cases, it nevertheless has moved on in the right direction. These, as well as sociological changes, both within India and abroad have culminated in developments that are exciting private equity investors the world over.
Factors favoring private equity investment
India’s democratic government and a free press that is rooting out corruption provide it a favourable investment climate especially in the long term. GDP has grown at rates between 6.5-8% over the last few years, a rate not seen in any developing country. Furthermore, the volatility of the Indian rupee has been curbed and inflation has declined implying lower interest rates. Thus equity markets seem to be a preferred investment. Since October 2004 the Sensex has been on the rise. Although it did witness a fall towards the middle of this year, the Sensex has recovered and in fact crossed the 12,000 mark a few days ago.
Globalization has played a key role with most production work shifting to countries like India and China. As a result there is a shift in consumption globally from the developed to developing and underdeveloped world. It is in these nations that one is witnessing a growing middle class that will take up a major share of the world’s total consumption in the years to come.
Removal of restrictions on Foreign Direct Investment (FDI) has added further impetus, the most noteworthy being the change in the retail sector where outside firms selling a single brand such as Nike are allowed to own a majority stake in Indian stores. The limit on FDI for development of airports, mining of diamonds and precious stones and power trading has also been lifted. Foreign Institutional Investment (FII) has boomed over the last couple of years.
One of the biggest changes has been in the confidence level of the Indian people. The contribution of the Indian IT companies to averting a worldwide Y2K meltdown was a major factor in this regard. It saw Indian IT companies going global and the government- unfamiliar with IT- having nothing to do with it. The result being all companies wanting to break away from government regulations.
Moreover, India has an advantage in healthcare including biotech, pharmaceuticals and telemedicine over its Asian counterparts. These are important sectors for a developing economy.
The Current Scenario
A look at Warburg’s other notable holdings in India throws light on the market scenario today. These include- Rediff Communication, Gujarat Ambuja Cement, Sintex Industries, Kotak Mahindra, Nicholas Piramal and WNS Global Services. As can be seen the firm has stuck to big, trusted stock market listed companies. This throws light on an interesting finding that unlike the US where this is rarely a strategy for a private equity investor, India with its demands of a billion people yet to be fulfilled, leaves enough room for even the largest conglomerates to grow. Moreover bigger Indian companies are increasingly seeking capital abroad to expand and thus will never play foul, making them less risky and hence the preferred choice for private equity investors.
As news of the Indian markets has spread, competition has increased and significant names in the private equity world can now be seen operating in India. These include Intel Capital, Oak Hill Capital Management, the Carlyle Group, Citigroup, General Atlantic Partners, CSFB Private Equity and CALPers among others. However most have invested only in double digits so far. A large number of Indian financial institutions like Kotak have created venture funds to tap the sector’s potential. So much so that fund managers expect returns of 20-30% a year.
India’s requirement for capital will continue for quite some time. Infrastructure improvement alone in the form of better roadways, more power generation, etc will require approximately $20-25 million in the form of investments every year. The biggest challenge is to lift nearly 200 million people out of abject poverty. Infrastructure, more than any other medium, has the potential to generate the jobs needed to attain this social goal.
The Stumbling Blocks
A major drawback is that concerning property rights. While the Indian legal system does offer protection of property rights, it does not do so with great speed.
Banking and finance is a critical concern for private equity investors in India , although the future of banking does appear optimistic. With a large number of foreign players, there would inadvertently be pressure on local players to be proactive.
Exit options are another stumbling block. Indian companies are more strongly linked to US firms than their Asian counterparts. Investors in these firms can exit through a US sale or initial public offering. While it’s easy to invest in India, it can be difficult to exit. The public markets lack liquidity and many companies are thinly traded in markets controlled by powerful local brokerages. The Warburg- Bharti case proved to be an exception though.
It is clear that private equity presents a huge potential for investment, more so in an emerging market like India. With reforms in place and the economy zooming ahead, the timing is appropriate. However what needs to be realized is that the key to successful private equity investment depends less on what happens in the financial capitals of the world than in developing villages. It depends on how quickly the internal market will develop. With a rapidly emerging middle class, hundreds of millions of people who will seek to have the same standard of living as everyone else in the world shall enter the picture. The sooner this is understood, the more beneficial will it be- for both the investor as well as the nation.
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