Private equity investors have favored India as a source for their emerging markets investments. Recently, China and Indonesia have supplanted it. All three countries have a need to build out infrastructure, education and healthcare systems but a few trends that have tipped the scales away from India.
The Chinese government is supporting domestic, local currency private equity funds with less regulatory oversight and restrictions on ownership. Carlyle Group, Blackstone and Texas Pacific Group have invested in joint ventures with Chinese state-owned enterprises and governments. The Indian stock market is performing poorly and not conducive to IPOs. Capital flows have been negative as foreign investors have been de-risking. Meanwhile, China's markets are restricted to local investors which makes it easier to exit private equity positions. Indian fund managers lean towards the deal-making side and not on generating high returns by adding value to the portfolio companies.
The Securities and Exchange Board of India (Sebi) has proposed some restrictive rules. Private investments in public equity (PIPE), private equity and infrastructure funds should register with Sebi. The general partner of a fund has to invest at least five percent of the fund assets. This restricts large funds to be managed by the Blackstones of the world.
India has an inefficient stock market with many small and mid-cap companies that are not adequately covered by research analysts. Unlike the standard private equity deal, some fund managers take minority stakes of 2% to 7% in these public companies and work with their managers to improve their businesses. Meanwhile, they work with the sell-side to raise their companies' profiles to investors. When the stock prices rise, they sell their position on the secondary market.
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