Private Equity

Private Equity

Private Equity

Investors are recognizing the opportunities India offers. Despite the credit and financial markets crisis, private equity players invested Euro 2.1Bn in India in the first quarter of 2008 in about 97 deals, of which 60% were in the late-stage segment. A key attraction for foreign investors has been the rapid increase in Indian infrastructure projects including power, roads, ports and airports

The Opportunity

Despite spectacular economic growth India has until recently lagged behind its peers in attracting investments from private equity. With a string of recent investment deals and the advent of large India dedicated funds, India is now in a leading position among emerging markets, particularly the Brics.

Private equity activity in India falls in to 3 main categories: Growth capital and venture, Infrastructure, and Portfolio company outsourcing (functions at existing portfolio companies outsourced to India-based service providers).

The buyout market in India is still in its infancy, though this has begun to change. The growth capital market is well established given the pace of economic growth which is making the country attractive and there is particular enthusiasm from investors for Indian infrastructure opportunities. Also in focus are the IT and the Real Estate sectors. India has been more politically welcoming for foreign investors than some of its rivals, thus helping attract foreign capital.

The sector focus has widened. Deal size – which was historically smaller and more growth oriented with exit mostly through IPO – has increased with the arrival of a wide range of investors including multinationals, private equity firms, hedge funds and sovereign wealth funds. Increasingly exits now involve selling to others.

Considerations

With increased investment opportunities and larger deal sizes, the ‘soft risks’ to capital and reputation have also magnified. In addition to the regular investment considerations, including routine FD and LDD, it is increasingly crucial for investors to adopt an ‘in the field’ and ‘touch-and-feel’ soft due diligence approach to investing in India.

Issues

Apart from usual technical, economic and legal elements, issues that need soft due-diligence scanning within the investment strategy/ decisions, negotiations, and contracting process, include:

• Cultural issues and practices – sector and community specific – having a significant bearing
• Title of licences and rights owned by target vehicle : validity and existence multiple claims and disputes
• Reputation, integrity, prior conduct and political affiliations of local Indian controllers/ vendors
• Identifying the real stake-holders in negotiations; subtle manipulations
• Regulatory and legal frame-work – reliability of local advisors
• Dealings with Government/ Bureaucracy – unwritten, undisclosed promises and expectations
• Lack of transparency, middle men, agents and surprises
• Relying on the local authorities to perform their obligations and on time
• Post-deal governance and stakeholders – the ‘soft issues’ in portfolio companies
• Relationship strategy – ‘soft issues’ in portfolio companies
• Overall contracting strategy – and pragmatic options for dispute resolution

 

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Biotech / Life Sciences Infrastructure/Power Private Equity Retail & Real Estate Manufacturing & Services

 

KNOW YOUR PARTNER, EMPLOYEE, LOCAL ADVISOR

Of all risk factors, this is most crucial in managing market entry down-side risks. Clients neglect at their peril the history of personal and business conduct of local partners, employees and advisors, their modus operandi with foreign partners, successes and failures, their cultural leanings and tactics, conflicts of interest, and even political affiliations.

A common mistake is to take no steps to uncover these ‘soft’ aspects – particularly in the face of intense friendliness, bonding and warm hospitality for which Indian business culture is well known.

Knowing your local partners can be a complex, multi-layered and prolonged effort throughout the life-cycle of the relationship

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