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Letter from Mumbai: India lures foreign private equity and venture capital

Letter from Mumbai: India lures foreign private equity and venture capital

PRIVATE equity players are once again taking a keen interest in India, acquiring companies in a big way. Last week, the US-based Blackstone Group, decided to acquire a majority stake in Indian IT outsourcing services provider Mphasis Ltd from Hewlett Packard in a deal that could be worth $1.1bn.

Though the Blackstone deal is not the largest picking in the Indian IT space — last April, French management consulting firm Capgemini acquired Indian-owned iGate for $4.4bn — it is the single-biggest investment in India for the American private equity (PE) fund.

“Mphasis has strong domain expertise in banking, financial services and insurance verticals,” said Amit Dixit, senior managing director and co-head of Private Equity in India at Blackstone. “Its deep relationship with marquee global customers has enabled it to deliver growth above the industry average in its direct international segment.”

Mphasis has been on the block for several weeks now and potential buyers included Tech Mahindra and Apollo Global Management. But Blackstone, which has been bullish on India for quite some time, stitched up the deal last week.

Besides acquiring 84pc of HP’s 60.5pc stake in Mphasis, Blackstone also made an open offer to buy a 26pc stake in the company from the public. The total cost for Blackstone will work to out between $825m and $1.1bn.

Blackstone had made two other acquisitions in the Indian IT space. Last September, it had repurchased the India-based BPO operations of Serco Group of the UK for £250m, four years after it had sold the unit. Interestingly, Blackstone had sold the unit — then known as Intelenet — to Serco for £385m.

In December, Blackstone had paid $170m to acquire a minority stake in IBS Software, an aviation solution provider, buying out the stake of General Atlantic and other shareholders.

“The reason we have made a strong commitment to the Indian IT sector is because this is a sector which has delivered very strong returns to Blackstone and other PE investors in India,” noted Dixit.

India’s IT and software services exports are expected to grow by 10-12pc in the current fiscal, reaching $121bn, according to the National Association of Software and Services Companies (Nasscom), the industry lobby.

Blackstone has invested about $6bn in India over the past decade. Over the last two years, it has brought in about $2bn in capital. Until last year, Blackstone had invested in multiple sectors including real estate, infrastructure, power and financial services.

However, many of the investments proved to be a drag on its performance in India. Blackstone is now focused on sectors including IT, pharma, consumer goods, logistics, building materials and cement.

PRIVATE equity and venture capital funding inflows into India shot up sharply last year, partly because of a change in investment climate and the expectations that the government will be able to sort out the bankruptcy law, bringing it in line with international rules.

Many public sector banks have been singed by reckless lending, which has resulted in the ballooning of their non-performing assets portfolio. The most notorious example is of the grounded Kingfisher Airlines, founded and run to ground by liquor baron Vijay Mallya, now cooling his heels in the UK and refusing to return to India for questioning by the Enforcement Directorate.

The National Democratic Alliance (NDA) government is hoping to pass the bankruptcy bill in the ongoing budget session of Parliament, which would allow a company to wind up within three months, instead of the usual 10 to 15 years that it takes.

Leading private equity players are attracted to India, where they see attractive valuations for assets that will be disposed of by lenders. Banks are now able to convert their outstanding debts into equity, which can then be sold to PE funds.

PE returns in India last year were among the highest in the world, gaining 85pc over the figures for 2014.

According to PwC MoneyTree India report, PE investments in India in 2015 added up to $19.5bn, the best ever for the country.

“India’s macros are looking good, with the current account and fiscal deficit at acceptable levels, a relatively stable rupee, inflation at below 5pc and, most importantly, a declining interest rate regime,” noted Sanjeev Krishan, PwC India leader, Private Equity. “This should encourage private investment as demand picks up.”

Real estate ($2.22bn) and IT and ITeS ($1.3bn) drew in the maximum funds, followed by banking, financial services and insurance ($910m). Telecoms and media and entertainment were the other major drawers of PE funds in 2015.

According to a report by Cushman & Wakefield, a real estate consultancy, there was a 33pc jump in global PE fund investments into the real estate sector in India in 2015.

As expected, Mumbai garnered more than a third of total foreign investments in 2015. Delhi and its satellite cities accounted for 25pc of foreign PE fund investments.

Logistics is another sector that is attracting a lot of interest from PE funds. he e-commerce boom in India has seen several start-ups entering the logistics space. The government now allows 100pc foreign direct investment (FDI) in warehouses and food storage facilities under the automatic route.

Warburg Pincus, a leading international PE firm, has entered into a joint venture with the Embassy Group to invest Rs6.5bn for setting warehouses across the country. It has also committed Rs8.5bn to Ecom Express, a logistics solution provider, which caters to the e-commerce sector.

Warehousing requires huge investments, as most of the facilities are to be put up in and around the metros and major cities, where land costs are prohibitive. PE funds, with their deep pockets, are able to fund start-ups that are now coming up to cater to the e-commerce industry.

Published in Dawn, Business & Finance weekly, April 11th, 2016

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