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Private equity firms are expected to be investing nearly $20 billion in India annually by 2010, according to a new study.
The report by Evalueserve, a research firm, estimates that India will attract $13.5 billion in private equity funding this year, double the 2006 level and a figure that would rank the country among the top 10 recipients of such funding in the world.
"There are over 366 firms currently operating in India and another 69 have raised or are in the process of raising funds and are planning to start their operations soon," the report said. "In total these private equity firms seem to have amassed $48 billion earmarked for investment in India between July 2007 and December 2010."
Most of the firms and their investors are based overseas. India has been one of the main beneficiaries of the global private equity boom. Firms flocked to the subcontinent initially to seek opportunities in the information technology and business process outsourcing sectors.
Trendsetters
Alok Aggarwal, the chairman and founder of Evalueserve, said the trend started with US technology venture capitalists who began setting up captive units in India in 2002. Later they began making investments in start ups and technology-related service ventures.
Aggarwal cautioned that the wave of investment in IT services and related industries had inflated valuations and led to the threat of overcrowding in some sectors. He cited the example of the knowledge process outsourcing industry, which covers everything from investment bank back-office analyst work to legal brief writing and other professional services. This relatively young sub-sector generates only about $3.5 billion in export revenues but there are already more than 300 firms in the sector. Unless the industry can generate more revenue quickly, it will probably suffer a shakeout.
Aggarwal said India was likely to weather any downturn related to the subprime mortgage crisis. But corporate valuations are high - listed Indian companies' prices/earnings ratios are up to 30 per cent higher than those in other emerging markets - and there could be some falls.
He said more experienced private equity firms would be eyeing new sectors for investment. He cited the example of Sula Wines and Champagne Indage, two homegrown wine companies that are growing 40 to 50 per cent a year and which have attracted investment from private equity firms GEM India Advisors, Arisaig Partners and Indivision Capital. "If you continue to invest in the IT and IT-enabled services, the valuations are quite high and although it is not at the level of the dotcom boom . . . whatever goes up too fast has to come down also."
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