India is awash in private equity

The PE boom isn't just for American corporations -India's economy is on a roll and foreign private-equity investments have exploded over the past two years, says Fortune's Yassir Pitalwalla.

By Yassir A. Pitalwalla, Fortune

(Fortune Magazine) -- India has never rolled out the welcome mat for foreign companies. Red tape, restrictions on ownership and other barriers have made it difficult for banks, retail giants and media companies to gain a foothold in one of the world's fastest-growing economies. But when it comes to foreign private equity, that's another story.

Indeed, the door is wide open: Foreign private-equity investments in Indian companies doubled to $2.2 billion in 2005 from the previous year, then increased in the first nine months of 2006 to $5.4 billion, according to industry newsletter Venture Intelligence.

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And unlike South Korea and Japan, where foreign private-equity groups have been castigated as "vultures," they have been embraced in India - even after scoring big profits, as TPG Newbridge did last year when it netted $260 million selling its stake in Matrix Laboratories to U.S. generics giant Mylan Laboratories (Charts).

"There's a far more mature and benevolent environment for private equity in India," says Leo Puri, director of McKinsey & Co. in India. "Unlike East Asia, there has historically been no distress associated with the involvement of private equity in India."

At first, foreign private equity chased India's IT and outsourcing boom. But now the opportunities are far broader, involving everything from finance to pharmaceuticals. Rising corporate profitability - the profits of listed companies have been growing 20 to 30 percent annually - has been drawing some of the biggest names in the industry.

And although the average deal size in 2005 was only $21 million, compared with $163 million in South Korea, the investments are getting larger. Last April, TPG Newbridge put $100 million into Shriram, making it one of the largest and best-capitalized truck-finance companies in India.

In October, Providence Equity Partners, another U.S. private-equity firm, bought nearly 16 percent of Idea Cellular, an Indian wireless company, for about $400 million. Singapore's government-owned Temasek Holdings has also invested heavily, buying a 9.9 percent stake in Tata Teleservices for about $300 million, the first time the $21.9 billion Tata Group has brought in a private-equity investor.

Other big players include Warburg Pincus, which racked up the largest profit on a private-equity investment in India when it sold most of its 18 percent stake in Bharti Airtel, the country's leading mobile-phone company, for $1.8 billion in 2005, six times what it paid seven years earlier.