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The new PE El Dorado

PE funds are pouring money into infrastructure, and real estate companies.

twitter-logo Manu Kaushik        Print Edition: Dec 02, 2007

India’s steroid-charged 9 per cent-plus growth rate and a roaring stock market are drawing throngs of private equity funds.

According to research conducted by Evalueserve, a global research and analytics firm, more than 366 PE and VC firms currently operate in India and another 69 are planning to start operations soon.

The gross investments of PE funds in the country is set to touch $13.5 billion (Rs 54,000 crore) during this year, making India one of the top seven recipients of PE funding in the world.

Further, private equity funding is projected to touch $20 billion (Rs 80,000 crore at current exchange rates) per annum by 2010. Says Ashish Gupta, Global COO & Country Head, Evalueserve: “Global money is rushing into India to take advantage of high-growth Indian companies that are delivering good results year after year.”

Providence Private Equity Partners and Apax Partners entered last year, and Kohlberg Kravis Roberts & Co., Cerberus Capital Management and Bain Capital are in the process of setting up a direct India presence.

Actis, a leading private equity investor in emerging markets, with $3.5 billion (Rs 14,000 crore) of funds under management, has mapped out investment strategies for the Indian market. In India, these PE firms look at an IRR of 40 per cent, way above the 14 per cent that they get in the broader western market.

The real estate and infrastructure sectors are currently the hot favourites, scoring over New Economy heavyweights such as IT & ITeS, banking, financial services & insurance (BFSI) and pharma. Says Rishi Sahai, Director, IndusView Advisors, a market and industry research advisory firm: “Of the $10 billion (Rs 40,000 crore) PE investment in India so far this year, real estate and infrastructure companies have received $5 billion (Rs 20,000 crore) via 52 deals.”

PE funds find Indian real estate and infrastructure companies attractive because of the high demand and the high rates of returns— 25-30 per cent IRR—that they generate, compared to the IRR of 15-25 per cent in other sectors.

 “The sector has the capacity to absorb as much as $300 billion (Rs 12 lakh crore at current exchange rates) over the next five years,” adds Sahai. The key segments: commercial real estate, roads, energy, ports and airports.

Almost all the big PE firms that have set up shop in India are pumping iron to bite deeper into this growing market. Recently, the Mumbai-based Matrix Partners expanded its consumer services fund from $150 million (Rs 600 crore) to around $450 million (Rs 1,800 crore). The firm will now make larger investments of up to $30 million (Rs 120 crore) and also continue to make smaller venture capital investments in early stage companies.

Thus far, it has invested in several start-ups like Asklaila, ItzCash, Seventymm, and Yo! China. The US-based Blackstone Group, one of the world’s leading private equity firms, has announced that it has a huge pipeline of deals and is looking at transactions in the $50-$500 million (Rs 200-2,000 crore) range.

Helping this trend along is the subprime crisis in the US and its fallout across the developed world. With several large US banks and other financial powerhouses in the throes of a crisis, PE funds have stepped up their search for relatively safe and attractive investment options elsewhere in the world.

Therefore, it’s advantage India—and China.

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