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As VC cash pours into India, buyout firms head for exits

Naspers Ltd., the South African internet services firm, had just acquired Manu Rekhi’s India bus ticketing, in a $120 million transaction that, amid a din of billion-dollar deals in India over the past 24 months, might have gone unnoticed on this side of the world.

Rekhi, partner at Inventus Capital Partners, the venture capital firm that backed redbus, however, was looking at a problem: $20 million of the exit capital set to come his way was being placed into escrow. Such are the regulations surrounding finance in M&A in India, and, in part thanks to the re-election of Narendra Modi, the nation’s popular prime minister, they are likely to be abolished, reduced to a single-digit escrow percentage more commonplace in American deals. If Modi doesn’t do away with it soon, Rekhi said he’ll impress his point upon the PM himself, when he and other investors meet with government officials to talk about India’s tax code (he said he’ll be joined by the U.S. Bar Association, as well as American VCs).

It is perplexing to listen to Rekhi describe India’s regulatory approach to business — “a top-down nanny state” — and his outlook: “the best is yet to come.”

Still, Rekhi, and a great deal of other VC investors appear to share a similar sentiment, and it comes as Indian markets are soaring, fueled by Modi’s commitment to draw more global capital into his emerging economy, and sparked again by plummeting fuel costs as of late.

Modi’s prolific Twitter account serves as a testament to his dedication to his country — it is far more active, and conveys more emotion than the standard PR-office driven accounts of U.S. politicians. He regularly singles out countrymen (and women) for business and academic achievement, aims to console those affected by national tragedies, calls for Indian infrastructure development — even posts photographs with Internet luminaries likeFacebook Inc.CEO Mark Zuckerberg. And, similar to the U.S. initial public offerings market, India’s economy appears to celebrate youth at a time when startups and relatively young companies are seeing valuations soar.

But even as Modi’s ascension to power appears to invite overseas funds into the country, private equity firms are pulling back. After years of leveraged buyout shops putting more capital to work in India, some are turning to exits, having helped beef up emerging markets companies across a variety of sectors over recent years. While some of the reasons stem from peculiarities of the country’s markets, others are just plain business judgments.

ONE AREA private equity firms have been particularly active is on the healthcare front — although, at a time when more companies are being prepped for exits, these assets are often being readied for an IPO.

HealthCare Global Enterprises Ltd., the Indian cancer care company generating around $200 million in annual revenue, is expected to hire bankers and debut on public markets there in 2015, The Deal previously reported. Backers includeTemasek Holdings Pte. Ltd.

In October,Warburg Pincus LLC, a regular investor in India, invested inLaurus Labs Ltd., which develops drugs and nutraceuticals, Before that,Kohlberg Kravis Roberts & Co. LP took on a minority stake in Gland Pharma Ltd., valued at about $200 million and at the time billed as the biggest PE deal in India’s healthcare space. The sponsor did not respond to requests for comment.

A common characteristic of India’s pre-IPO healthcare deals is an abundance of minority stakeholders, a characteristic that turns off many sponsors, especially in a market half a world away.

At a time when buyout targets are scarce, India’s current regulations make it cumbersome for foreign LBO shops to do little more than pick up minority stakes — which likely accounts for some sponsors’ reluctance to dive into the region as they have in some other emerging markets, like China, according to one person familiar with the industry.

“The unwillingness of most promoters in privately held firms in India to sell controlling stakes in their companies, coupled with the fact that the majority of companies in India are family-owned, has left private equity investors in a crowded space with very few deals to deploy their cash at very expensive valuations,” said Venkat Pasupuleti, co-manager of the Dalton India Fund at Dalton Investments LLC.

And PE investors seeking digital assets run up against strategic competitors looking to make investments, and able to wield famous brands before awed entrepreneurs.

In late November,Rupert Murdoch‘s News Corp. — which owns Dow Jones, the Wall Street Journal and recently acquired operator Move Inc. — put $30 million intoElara Holdings Inc., operator of property portal News Corp.’s online deal in the U.S. set it back $950 million by comparison — and even though the company holds only a minority position, it amounts to a 25% stake, which is a lot more than $30 million will buy your company that processed $1 billion in transactions in the frothy U.S. venture market. Inc., which has bought into everything from daily deals to robot warehouse workers in the U.S., is also taking a gamble on Indian startups. The company is nearing a deal to buy Rocket Internet GmbH-backed retailer in a deal that could surpass $1 billion in valuation, Indian website reported last month, and, in October, bought QwikCilver Solutions, a gift card company based in India.

Then there’sMoody’s Corp.which was allowed in 2013 to take a stake in a ratings agency. Several sources described India’s debt markets as developing, but increasingly attractive to foreign investors.

ONE U.S. PRIVATE EQUITY firm with plans to develop its role as a lender and asset manager is KKR, which earlier this year revealed plans to provide lending to companies in India at a conference in Mumbai.KKR’s method — reflecting its strategy in the U.S., where it has also provided debt for big LBOs — could become more popular with other sponsors.

Still, 2014 isn’t going to be a banner year for PE investment in India — then again, it comes in the wake of years of a plunging rupee, and slower-than-expected GDP growth that has locked some LBO shops into their portfolio companies longer than they would ordinarily anticipate. So perhaps it’s no wonder that PE is heading for the exits.

The Wall Street Journal recently noted that PE firms, including3i Group plc,Providence Equity Partners LLC,General Atlantic LLCand others are lining up or completing profitable stake sales.

Add Carlyle Group LP to that list. The firm has made several successful exits, includingTirumala Milk Products Ltd.— reportedly producing a 3 times cash multiple on the $85 million the PE firm invested in 2010 — network security firmCyberoam Technologies Pvt. Ltd., andRepco Home Finance Ltd.Those deals were all in 2014, although the sponsor declined to answer questions about its ongoing commitment to the region. Since 2000, according to a source, the private equity firm has spent more than $1 billion on India deals. No different than other U.S. PE firms looking to put capital to work in the healthcare sector, Carlyle found an opportunity — in India, of course, not America — in 2013, taking a stake in hospital Global Health.

Carlyle isn’t the only U.S. shop looking to reap exits in a rising market: according to a recent Reuters report, Bain Capital LLC‘s planned sale of a piece of Hero MotoCorp Ltd., India’s leading scooter and motorcycle maker, attracted enough interest that it unloaded most of its stock, bagging $400 million in the process.

“For three years, private equity investing in India continued and increased,” said Arun Gore, president and CEO of Gray Ghost Ventures, a regular investor in India. “The market is very richly valued at this time.”

That could be part of the reason private equity is having such a time trying to put money to work. Another similarity between India’s deal scene and the U.S.’ is the regularity with which sponsors, for a variety of reasons tethered to a lower Ebitda multiple threshold for M&A, are having a difficult time investing in a market now besieged with strategic investors.

Where PE isn’t getting elbowed aside by the corporate players ranging from Amazon to Moody’s they’re running into hedge funds.Tiger Global Management LLC teamed with Warburg Pincus and VC backers to fund Indian auto sales website in October. The month prior, Tiger backedQuikR, a classifieds service in India, with $60 million, and the month before that, Hike, a mobile messaging service, with $65 million.

IN GENERAL, BALLOONING valuations are making U.S. venture investors look downright stingy. And the market is likely to heat up even more in the coming years. India’s online economy could one day — soon, some say — dwarf that of America’s.

“Think China, 20 years ago,” said Vivek Wadhwa, a prominent Silicon Valley academic and regular blogger on tech. “That is where India is today. India is about to add half a billion Internet users over the next three to five years as smartphones become cheap as cellphones.”

Digital startups — freed of the shackles of fuddy-duddy family ownership and complex capital structures — will reap the benefits of a burgeoning online economy. It’s starting already. About a year ago, Flipkart Online Services Pvt. Ltd., the Indian online delivery service, was valued at a seemingly paltry $1.6 billion. A year later, it would raise far more than that, shocking industry onlookers.

That was when the company took on about $500 million in funding, across the balance of 2013, a batch of cash only reserved for Silicon Valley’s “honor roll.”

In 2014, Flipkart, has raised more money than even Uber Inc., or at least that’s the case as of Dec. 1 (Uber is reportedly currently in the midst of a mind-boggling convertible debt fundraising, and, simultaneously, a separate equity round). Packing on more than $1.8 billion in capital as its valuation has soared to the $10 billion mark, Flipkart’s cash haul for the year makes the $1.2 billion Uber raised across the first 11 months of the year look like a weak poker raise.

Taking Wadhwa’s comments into account, along with India’s population of 1.25 billion, one might understand how the “next Amazon” might not be found on this side of the world. Of course, it isn’t necessarily Flipkart, and India’s premier business family is making a bet on a different company — albeit, at a very high valuation.

Tata Sons Ltd.chairman emeritus Ratan Tata took a stake of less than 1%, another Indian e-commerce site, in a deal reported in November. The septuagenarian billionaire’s stake in the company is worth just a few million dollars, but it valuesSnapdeal, which has raised hundreds of millions in private funding — at up to $2 billion.

INVESTORS HAVE BEEN burned here in the past. Modi’s challenge, for now, is putting a prettier face on a country with a reputation for rulebooks as difficult to navigate as its roads. Looking at China’s astronomical development over the past decade, it is almost hard to fathom that in 2007, before India’s currency plummeted against the dollar, the pace of PE investment outpaced that of even China. A KPMG LLPreport put PE dollars spent in India at more than $17 billion in 2007; China, just $11.5 billion. A separate Bain & Co. report, from April of this year, highlights another point of pain for LBO shops; the $6.8 billion in exits expected for PE firms in 2013 wasn’t much of an increase and more than half the capital put to work in 2005 was not fully exited. Until PE gets the returns it needs, it may not have the justification to spend more with its limited partners.

In the time since, of course, China’s markets have attracted billions more in foreign capital, headlines and prestige. If India is indeed going to produce an equivalent of Jack Ma’ Corp., that company hasn’t come to light yet — or, at least, its valuation is in a downright-reasonable single-digit-billions range. So while LBO shops are readying offerings and selling high, VCs feel India’s second go-round could be shaping up just now, with Modi’s re-election. They both can’t be right.

“Investors got all fired up a decade ago,” said Michael Jackson, a partner withMangrove Capital Partners, another regular VC investor in the region, “and then were disillusioned by slow progress.”


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