Private equity in India: Struggling with multiples(1)

With a population of 1.3bn, India is a market that investors can’t ignore. But it comes with its own particular set of problems.

India is often described as one of the best structural growth stories in the world. A population of almost 1.3 billion people, a growing army of consumers, and an internet market which is forecast to grow from $11 billion in 2011 to $137 billion by 2020, according to Morgan Stanley.

All of this means a lot of GPs and LPs are scared of missing out on its rich growth potential, even though many got burnt by the global financial crisis the last time they opened their wallets there.

Indeed, recent interviews between Private Equity International and some of the world’s largest global private equity investors, reveal just how much time international investors are devoting to finding opportunities to buy.

CDPQ’s vice-president of private equity and infrastructure, Andreas Beroutsos, told PEI recently that his firm was devoting huge time and effort searching for investments in India and would soon open an office there, despite not yet having deployed any capital. 

Hamilton Lane’s Asia head Juan Delgado-Moreira told PEI that his firm had also been very active in the country, although he struggled to invest in Indian funds because “pricing remains as high as it was in 2010 and 2011”.

And herein lies perhaps the biggest stumbling block from a private equity investment perspective. India’s stock markets and its vast universe of 7,000 listed companies trades at a premium to most of its global peers, meaning entry multiples are often too rich for GPs who struggle to understand the multiples they are paying for growth.

It was a refrain heard time and time again at PEI’s India summit in Mumbai last week. The relative ease with which companies can list on India’s stock exchanges was cited as a prime reason for rich entry multiples. India has less rigorous controls on companies coming to market than most of its global peers, meaning promotors can often just set their own price for an IPO.

Spencer Swayze, director, natural resources at Texas-based limited partner UTIMCO, told PEI that it was often difficult to understand the metrics when buying into Indian firms: “The most difficult thing for us in India is understanding what we are paying for growth, compared to in the US or Brazil for example. It is hard to determine what is the true risk-adjusted return.”

Swayze added that a company that may be trading on six times earnings in the US would often be on nine times earnings in India, making it more difficult for private equity firms to make a case to buy, especially when most Indian deals leave the promotor with majority control.

Aberdeen Asset Management partner Wen Tan also bemoaned the lack of public/private arbitrage. He said that a company that would trade at around eight or nine times earnings in South-East Asia might trade on 12 times in India, and that some GPs had become conditioned to just accept the higher Indian multiples. “There is a very different concept of valuation in India, and maybe other markets trade at a 30 percent discount,” he said.

A week earlier at the BVCA conference in London, PEI heard the same issue expressed by Warburg Pincus managing director Martin Dunnett, who told his audience that the firm was seeing a slowdown in activity in markets where pricing was high. He singled out India as a “very tough” market.

No one wants to miss out on India’s promise, which is why so many firms are looking at the country. But the pace of deployment to likely to remain relatively slow until there is a significant reduction in valuations.