Big-ticket deals elude private equity

Small- and mid-sized firms attracting max investments

MUMBAI: Private equity’s (PE) big fish are finding it hard to crack deals in India that are respectable by their standards.

Last month saw Blackstone striking it big with investments in Gokaldas Exports ($170 million) and Nagarjuna Constructions ($150 million). But that was an exception.

Such big-ticket transactions have not been easy to come by, especially for those with a mandate to invest only giant sums.

Data compiled by Venture Intelligence, a research service focused on PE and venture capital activity in India, shows that 77%, or 232 of the 302 PE deals in India in 2006, were in the sub-$25 million range.

Of these, 104 were in the $10-25 million range, 55 in the $5-10 million band, and 73 were of the sub-$5 million variety.

The biggest PE deal in India so far has been one by Carlyle — a $650 million investment for a 5.6% stake in Housing Development Finance Corporation.

General Atlantic’s $18 million investment in Daksh eServices in 2002 was among the lowest.

As a result, some PE firms are viewing India as a different market and are willing to scale down their minimum threshold levels here.

Providence Equity Partners, which invests between $250 million and $2.5 billion in equity Investments in North American and Western European companies, is flexible with the size and type of transactions when it comes to Asia.

“We have set the minimum threshold level at $50 million,” said managing director Biswajit A Subramanian, who moved from the firm’s London office to Delhi recently. He’s in the process of setting up an India team for Providence.

Even Blackstone has consummated a $50 million in India, quite unheard of in its annals, when it picked up a stake in Pune-based Emcure Pharmaceuticals in July 2006.

In fact, small and medium-sized companies in India have been attracting the largest amount of PE investment.

General Atlantic’s Daksh eServices deal was the only sub-$25 million investment done by the global PE major.

“Our deal size ranges from $50-$500 million. We have made 10 investments in India for a total of $744 million. Only one of those deals was for under $25 million and that was completed in 2002. The rest were all above $25 million,” a General Atlantic Partners spokesperson said in an email.

“Our investments are usually for large minority stakes and not for control position,” she added.

So, while there are those like General Atlantic which are not too flexible on their investment philosophies, there are those like Providence Equity Partners which are.

“Funds that look at huge deals, such as only buyouts outside India, are comfortable doing much smaller investments here. This is because there aren’t too many large deals available in the Indian market, and if you cannot be a significant dealmaker, then you cannot justify having an office and team in India,” said Arun Natarajan, chief executive officer, Venture Intelligence.

Adds Subramanian of Providence: “In India, there are two buckets of deals. The first larger bucket comprises the small deals, and is a reflection of the stage of development of the market here. Then there is the second smaller bucket, which are big-sized companies. But either because of valuation issues or the percentage stake available for sale, not too many deals have been consummated,” said Subramanian.

But Subramanian is confident that, over time, the second bucket will only get bigger and better. Providence had itself picked a $400 million, 15% stake in Idea Cellular in October 2006.

But the number of such deals hasn’t been too encouraging. In fact, some of the big PE firms have preferred to keep away rather than go for everything up for grabs.

Carlyle’s buyout division, for instance, headed by Rajeev Gupta, the erstwhile joint managing director of DSP Merrill Lynch, has done just one deal in India so far - a $650 million investment in HDFC.

This shows the willingness of PE firms to stick it out here to pounce on the right opportunity.

“We think there are many opportunities for growth companies that are for sizeable investments,” the General Atlantic spokesperson added.

Even Natarajan concludes that there are a lot more big deals getting done these days.

“Up to 2004, we used to see one or two $100 million deals per year. Now, the frequency seems to have increased to every quarter. It shows that the appetite for and availability of such deals is definitely increasing,” he said.