Global Private Equity Firms, Burned Once in India, Are Back in Force

Mumbai: India - Hanging on the wall in the modest office of Nitin Deshmukh, the chief executive of the Kotak Private Equity Group, is a photograph of a tiny man scaling a tall sand dune. "Take pride in how far you have come," the inscription says. "Have faith in how far you can go."

For investors in Indian private equity, it's a maxim that is well understood. Indian private equity exploded a decade ago when global firms like Blackstone, 3i Group and Apax Partners flocked to India, drawn by the spectacular returns produced by local funds.

But the industry hit a wall after the 2008 financial crisis. The rut was painful and prolonged, lasting long after the financial collapse, in part because many funds had allocated the bulk of their capital at the market peak, pouring much of it into greenfield infrastructure businesses that relied on government promises that never materialized. The cash was also deployed just as India was approaching a period of subpar growth, a sharp depreciation in its currency and a loss of appetite for initial public offerings, one of the most common ways private equity firms exit their investments.

According to a McKinsey & Co. report published in December, of the $50 billion invested in private equity in India from 2000 to 2008, investments with a cost basis of $16 billion have been exited for a value of $27 billion. That means about 70 percent of the deals have not been exited. Private equity firms normally exit investments after four or five years.

"In the last five or six years, a lot of tough lessons have been learned; a lot of money has been lost," said Shashank Singh, the head of India operations for Apax, which is based in London.

But the winds have shifted with the sharp drop in oil prices, which reduced India's current-account deficit to 1.6 percent of gross domestic product in the fourth quarter from more than 2 percent earlier. The rosier trade picture has invigorated the stock market, clearing the way for private equity firms to exit their investments.

"PE funds were stuck for exits for the longest time because of the negative sentiment in the capital markets," Singh said. "That sentiment has changed over the last nine months. Exits are on, and they are on in a big way."

Singh was focusing on the Indian private equity market before the boom. Born in Cyprus, the son of a diplomat, Singh was studying at Harvard Business School in 2003 when he pitched the idea of opening an India office to Apax's chief investment officer.

Singh spent that summer in India and after graduating a year later, he joined Apax in London. In 2007, he moved to Mumbai to open Apax's first office in India. "We thought it would be a substantial private equity market," he said recently in an interview in his office.

Apax has a different strategy from many of its foreign rivals. It focuses on far fewer deals and writes "far bigger checks," Singh said. Over the last eight years, it has invested $1 billion in four transactions with an average check size of $250 million. Apax has returned $400 million to investors, according to a person close to the firm.

Unlike in the United States, where private equity historically has been known for loading up companies with debt and re-engineering them financially, it plays a different role in India.

One area that has benefited from private equity's interest has been health care.

Deshmukh of Kotak said that before the arrival of private equity, the Indian health care landscape had been defined by government hospitals run by trusts. Now, thanks in large part to private equity investments, India has a more vibrant health care sector.

It has also been profitable for the private equity firms.

Soon after arriving in Mumbai in 2007, Singh closed Apax's first deal in India, a $104 million investment in Apollo Hospitals, an Indian hospital chain based in Chennai. It increased its stake to about 20 percent in 2008 by investing an additional $65 million. It did not do another deal in the Indian market until 2011.

Apax drew on its global experience in hospitals to help maximize value at Apollo. Operating theaters are the highest-earning assets for hospitals, but most surgeons want to schedule operations from 9 a.m. to 6 p.m. during the workweek. Apax worked with the company to offer incentives to surgeons to prod greater use of the theaters, like charging less from 5 a.m. to 9 a.m. Apax also encouraged Apollo to copy Western practices and reduce the length of hospital stays.

"In India, the mindset is to get cured in the hospital and then go," said Krishnan Akhileswaran, Apollo's chief financial officer. He said Apollo started holding sessions to educate doctors about sending patients home if they were ready to be discharged.

In 2013, facing a nadir in the private equity market, Apax sold its stake in Apollo, netting a return of 2.5 times its investment in dollars, according to a person briefed on the transaction.

Despite bright spots, private equity has not fully rebounded since the financial crisis. After hitting a low of $1.4 billion in 2013, India-focused funds raised $5.5 billion last year, half the peak of 2008, according to Preqin, which tracks the private equity industry. (The Preqin data does not include investing in India by global funds like Apax and Blackstone.)

Puneet Bhatia, head of India for TPG, which has invested $1 billion in the country, according to industry sources, and has returned half of that money to investors, thinks the future for Indian private equity will be more attractive than in the past. TPG recently raised about $6.5 billion for its global buyout fund.

"If you look at the Indian private equity scorecard 12 to 18 months from now, it is going to look more positive than looking in the rearview mirror now," Bhatia said.

© 2015 New York Times News Service