The Arabs are coming... via pvt equity

Satish John and Sanat Vallikappen

Middle East investors largest contributors to some of the recent pvt equity funds

MUMBAI: If more and more private equity (PE) firms are refraining from investing in tobacco, liquor and gambling companies, it shows the growing Arab interest in India.

As the oil sheikhs find alternative investment avenues like rupee-backed assets an attractive proposition, PE firms are undergoing a 'purge'.

Alok Sama, founder and president of Baer Capital Partners, which recently raised a $250 million PE fund for India, says one-third of the money was from the Gulf region.

Sama said the $250 million fund will not invest in alcohol and gambling companies -  sin businesses for Gulf investors.

"If you examine the books of funds like Carlyle and New Vernon, they raise a chunk of their capital from the Gulf region," said a PE investor who did not wish to be named.

The trend started after 9/11, when a lot of Middle East investors started  withdrawing money from the West and looking for safer avenues.

Its traditional ties with the Gulf countries and success story among emerging markets made India an obvious destination.

Abraaj Capital, one of the largest PE players in the Middle East, North Africa and South Asia (MENASA) with over $4 billion of assets under management (AUM) currently, launched a $300 million India-focussed fund with Sabre Capital Worldwide Group last year.

The fund takes majority or significant minority stakes in listed and unlisted Indian companies, focusing on specific sector opportunities in their growth, buyout and early stages.

Early this year, the fund made its first acquisition of a strategic stake in Ramky Infrastructure Limited (Ramky), part of the Ramky Group, a rapidly growing infrastructure construction and development firm in Hyderabad.

Evolvence Capital, a Dubai-based firm, started an India-focussed fund of funds in mid-2005, targeting PE, real-estate development and infrastructure in India

The fund believes the "sweet spot" for the Indian PE space over the next couple of years lies with fund managers who target the mid-market transactions - in the range of $10-30 million.

A recent Wall Street Journal article said that the combined government investment arms of Saudi Arabia, Kuwait, Abu Dhabi, Dubai and Qatar hold an estimated $1.5 trillion of investible funds.

K G Krishnamurthy, managing director, HDFC Property Ventures, which recently raised an $800 million fund, also said a significant chunk came from the western Gulf.

"These (from the Middle East) investors understand Indian markets. A lot of Indian developers, including Shapoorji Pallonji and L&T, have worked with Gulf developers for various projects. The comfort level of having worked with them before has encouraged them to invest in projects in India," he says.

"Their decision-making is quite quick," says Krishnamurthy.

Gulf-based investors are also looking at markets where the economy is growing faster, which means that assets backed by the Korean won, Malaysian ringgit and the Indian rupee are the ideal parking bays for appreciation.

Another reason is that many of the investment houses have Indians, who are aware of the markets and regulations of their home country, manning crucial functions.

Narayan Ramachandran, chief executive officer and managing director of Morgan Stanley Investment Management India, says, "Rupee appreciation is only a manifestation of productivity enhancements and growth opportunities in India. So, the real reason is solid long-term growth potential," he said.  

Citing the reasons for the growing interest in funds raised from the Middle East for India, Ramachandran says: "Oil price has created a lot of institutional wealth, relative economic growth rates are better in emerging markets than in developed markets, emerging markets are a high-growth region that require capital and offer decent returns on capital, proximity, and of all the emerging markets, China and India have a very deep domestic market. This means that growth can last for a long time."

The Abu Dhabi Investment Authority, the sovereign body responsible for investing all of the Abu Dhabi government's oil revenues and assets in countries and asset classes across the world, is believed to have between $500 million and $1 trillion in assets under management (AUM).

Similarly, the Kuwait Investment Authority is said to have $200 billion in AUM.

Compare these to the US' largest pension fund, California Public Employees' Retirement System (CalPERS), which manages around $247.7 billion. Or, the biggest university endowment - Harvard University's $25.9 billion endowment - according to a 2005 Bloomberg survey of the 25 largest higher-education endowments.

It shows that the size and scale at which these Gulf institutions operate, and the petro-dollars, which only seem to be growing, has established a high standing for these institutions among global PE investors. The Qatar Investment Authority is another big institutional investor from the Gulf region.

Oman Investment Fund (OIF) is another example. It invests directly into businesses and real estate, globally, and not through funds. In India, it, along with global PE firm, 3i, and Cisco, invested $125 million in Mumbai-based TV content and broadcasting company Nimbus Communications.

"We have made one investment in India, but are actively looking at a number of other opportunities," said OIF's chief investment officer Vijai Gill in an email.

"Yes, Middle East investors are very attracted to the India growth story, and other growing regions such as Turkey, central and eastern Europe, China, Vietnam, etc," he added. He wasn't willing to divulge his fund's size though.

Other examples of direct investments include that of Shuaa Capital, a leading Dubai-based investment company that recently picked up a stake in Edelweiss Capital, an Indian financial services house in the city, which has just unfolded plans to list on the local stock exchanges.

Last year, Dubai Financial had acquired a majority stake in Thomas Cook.

Nakheel of Dubai joining hands with DLF, and Dubai's Emaar partnering with India's MGF are cases in point where investors and developers from the Middle East have promoted joint ventures in India.

P Krishnamurthy, CEO at Dubai-based Al Rostamani Group's financial services division, said: "India's growth story as an emerging market has attracted attention from across the globe and ME investors are no different, especially given their traditional proximity to the country. Going forward, investments will only increase as smaller private equity players take a cue from the likes of Emaar Properties and BankMuscat, which have done their due diligence on the country."