Indian capital
With a backdrop of uncertain global conditions India’s economic growth has doubled, writes Nipun Sahni FRICS
India has seen twice the growth rate over the past decade at 7-8% than over the previous five decades when it grew between 3-4%.
India has been a key beneficiary of global capital flows and Indian entrepreneurs have demonstrated their ability to not only withstand intense competition but also utilise that capital in creating world class companies across industries.
Compared to the century old public markets, which had thus far been the traditional source of equity capital, the Private Equity (PE) markets are around a decade old in India and funds wanting a piece of the action have only increased.
PE has emerged as the biggest new source of capital to corporate India, having committed investments of approximately US$40bn over the last five years, while the capital markets reportedly raised US$56bn in the same period.
India has never been in such a sweet spot for investment, and this is why: In the developed markets PE has witnessed increasing allocation to ‘buy-out’ style investing, driven by increased leverage and an appetite for collateralised loan obligations.
Most capital entering India is growth capital with investors adopting a ‘buy-in’ approach by investing in growth companies. The challenge here is to price growth into deals given a high degree of local optimism and restraint being exercised by private equity players due to the cautious global environment.
The real estate sector has been the biggest single beneficiary from both public and PE markets. Having attracted almost US$25bn of equity capital or 25% of total capital flows, in the last five years, the depth and breadth of investments has transformed the sector from a laggard to a leading sector in the India story.
Real Estate Private Equity Funds have raised nearly US$15bn of capital between 2005-2008 and there are over 50 funds that have invested in Indian real estate.
Funds have been sponsored by domestic financial institutions, corporates and international investors led by global financial institutions.
The sector also witnessed a high degree of interest from hedge funds and the investor base in funds has wide representation from pension funds, endowments, sovereign funds and private banking clients.
In addition, by the end of 2009, US$8bn was raised from domestic stock markets and another US$3bn was raised in offshore stock exchanges notably the London Alternate Investment Market and Singapore REIT market.
So far this year US$1bn raised by four developers with more than a dozen waiting in the wings to raise US$4bn more.
Valuations expectations remain high and execution challenges provide limited visibility on earnings beyond 12 months.
An overhang of new supply, underperformance of past listings and investor fatigue is likely to force developers to shift to lower valuation expectation, reduce size of offerings or postpone IPOs to a later date.
To conclude, private equity as a capital route has taken deep roots in India and is a stable source of capital for companies. Investors looking to allocate growth capital will find it a hard market to ignore.
Real estate capital that was invested in earlier years has provided scale and greater credibility to the sector.
The sector has a big opportunity ahead as it develops high quality real estate for people to live, work and shop.
Nipun Sahni FRICS is managing director of DSP Merrill Lynch Capital Limited
