Friday Letter A bigger slice of the India pie

June was a good month for private equity in India. New data from advisory firm Grant Thornton shows that, for the first time, the value of private equity deals in a single month has overtaken that of strategic M&A. The 36 private equity investments in India during June totaled $1.83 billion (€1.32 billion), whereas the 24 strategic M&A deals were worth $1.56 billion. 

Most interestingly perhaps, the boost for Indian private equity had much to do with the steadily increasing investment in real estate and infrastructure in the country. In June, nearly $1 billion of the $1.83 billion spent by private equity firms in India went into real estate and infrastructure projects. Grant Thornton partner CG Srividya says real estate and infrastructure has actually been the largest single investment area, in terms of money spent, for private equity deals so far this year. Out of the 200 private equity deals completed in 2007, real estate and infrastructure accounted for 27, Srividya says, totaling more than $2.2 billion.

The deals are getting bigger, too. Investments in property and infrastructure made up four of the top ten private equity investments in India so far this year: Morgan Stanley’s $150 million investment in Oberoi Constructions; Lehman Brothers’ and DE Shaw’s $600 million engagement at DLF; Goldman Sachs’ $300 million bet on Century Group; and Avenue Capital’s $500 million investment in SKIL Infrastructure.

Of course the driver for all of this activity is India’s booming economy. The dramatic jump in the disposable income of middle-class Indians has increased the value of housing and commercial property, driving double-digit growth for India’s real estate sector. But with GDP growth at well over 9 percent, many are questioning whether this kind of growth is really sustainable.

One of the things worrying analysts is the fact that India’s infrastructure, particularly its transportation networks, remains antiquated and doesn’t seem to be improving at anywhere near the speed at which the economy is growing. This could spell both trouble and opportunity for private real estate funds.

On one hand, the need for rapid infrastructure development means there’s no shortage of opportunities. But if that infrastructure doesn’t develop apace with the development of the economy, India’s rapid rise could come to a screeching halt. A falter in the economy would mean Indian consumers wouldn’t have the money to spend on the homes and commercial centers that private equity funds are pouring money into at the moment.

That said, private real estate investors are helping themselves in more ways than one by investing in infrastructure. While taking advantage of a growing need, improved infrastructure will also provide the base that is essential if India wants to maintain its current rate of growth. Without improved infrastructure, the real estate being created at the moment will end up being the leftovers from a boom that couldn’t sustain itself. Market participants deploying capital today will be praying it won’t come to this.