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Foreign investors halve Indian private equity exposure

MUMBAI: Global risk investors allocated 50% less capital for private equity in India to chase opportunities in other emerging markets during the first six months of 2012.
Private equity fund raising for India stood at $1.22 billion, attracting well below 10% of the total capital ploughed into emerging markets. The reduced commitments – from western university endowments, pension funds and family offices – leave private equity funds with shrinking dry powder to cut deals even as they become a mainstream source of capital for India Inc.
The latest figure compared poorly with $2.45 billion raised for India in the first half of 2011. India’s share of private equity fund raise in emerging markets declined to 7.1%, dropping from almost 11% in the year-ago period, according to data from Emerging Markets Private Equity Association (EMPEA). The numbers confirmed fears that long-term investors behind private equity industry, called limited partners (LPs) in industry parlance, were reducing exposure after pumping more than $50 billion into India’s growth-hungry companies.

Coincidentally, India reported the steepest fall in the number of private equity investments in the first six months. Deals went down 25% in marked contrast to surging numbers in Brazil and Russia. The solace was a more sober 8% decline in China which indicates that cooling economies in the two major growth economies has had investors worried.
A recent JM Financial note on Indian private equity said investment deals by value stood at $3.98 billion, down from $5.2 billion in the first half.
“There are three main factors impacting private equity fund raise and investments in India – negative headlines on local political and regulatory situation, unimpressive return on investments and a precarious global economy,” said Sameer Sain, co-founder & managing partner of Everstone Capital, an India-focused private equity firm with assets worth over $1.6 billion.
EMPEA vice-president Jennifer Choi said risk investors were asking questions about a lack of performance record for deals in India relative to high valuations.
“Political and regulatory uncertainties around whether the Congress party will be able to achieve investment reforms in the interval leading up to elections and an increasingly fractious environment are among other concerns,” she added.
India’s private equity story, which gathered stream in the last decade, has been attacked for poor return on investments and sticky exit environment.
India’s intransigent private enterprises and expanding list of funds feeding on access to capital drove up valuations making life tougher for this investor class.
“Good players will always find investors. There are too many India-focused private equity funds. It is like a cottage industry. There will be a shake-up,” Sain explained.
EMPEA said the India’s basic market fundamentals – very large, growing, consumptive population – remained attractive but several fresh challenges hindered the pace of investments.
“Infrastructure is both a plus and a minus. Need for investment is immense, which the recent power outages made abundantly clear. But challenges in executing public-private partnerships (PPP) structures have slowed investments in the sector and in major projects,” Choi added.
International media more recently have focused on private equity’s growing fascination with Russia after the return of President Vladimir Putin and Latin American economies led by Brazil. Still, EMPEA-compiled numbers showed both significantly lagged India and China in fund raising. Middle East and North Africa ( MENA) as well as more nimble South-East Asian nations jostled for risk capital allocations to emerging markets pegged at $17 billion in the first six months.