India has long enticed adventurous outsiders and the latest explorers are private equity funds. India’s rapid growth is creating a slew of investment opportunities but, warn Hugh MacArthur and Ashish Singh, investors need to be patient and follow some basic rules.
Though it accounts for just 12 per cent of the total Asian private equity market, India is the region’s fastest growing, with a 51 per cent annual growth rate compounded since 1998. During the first half of 2005, private-equity investors poured $733 million into 81 transactions, surpassing the total number of deals for all of 2004 and on track to reach a record $1.5 billion for the full year.
There is little mystery about why US and European private-equity fund managers find India so appealing. With GDP growth averaging some 7 per cent annually for the past five years, the subcontinent rivals China as Asia’s most dynamic economy. India’s state-owned companies are spinning off non-core assets as they pare down to meet global competition, creating a large pool of potential acquisitions for deal-hungry offshore buyers. And South Asia offers private investors advantages China cannot match, including: the world’s second largest English-speaking population; a transparent system of commercial law; a bustling entrepreneurial culture; and, by comparison to other emerging economies, a robust equities market that now tops $450 billion in total capitalisation.
Even more beguiling for privateequity portfolio managers are the eye-popping returns their pioneering peers have scored in recent months. In the first half of 2005 alone, a dozen high-profile sales netted private-equity players some $1.1 billion. Leading the charge was Warburg Pincus, which parlayed a $300 million investment it made in 1999 in Bharti, India’s leading mobile telecom provider, into a profit of some $560 million through the partial sale of its stake in the company. In so doing it reaped a bounteous internal rate of return in excess of 40 per cent.
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