When India’s largest real estate developer, DLF, went to market in June, it made waves that splashed well beyond the shores of the subcontinent.
The initial public offering became more than a sale of shares; in some ways it represented a final coming of age of India’s capital markets. The company raised US$2.25 billion to go down in history as the largest ever Indian IPO.
But it may not take long for another company to top it. Already, Reliance Power has outlined plans to raise around US$3 billion later this year.
The DLF IPO followed on the heels of a number of high profile acquisitions outside of India by some of the country’s largest companies. Perhaps the most obvious example was the move by the Tata conglomerate, which owns Tata Steel, to takeover Dutch steelmaker Corus – a much larger company by assets.
According to Thomson Financial data, there were 70 IPOs in India during the first nine months of 2007 which altogether raised US$6.8 billion. It is the highest total on record, higher than any previous full-year total. India is now the seventh largest IPO market in the world with a 3.5% market share. This is a jump from just 1.6% during the same period in 2006, according to Thomson.
Although the country’s IPO total is still well bellow the US$31 billion China has seen so far this year, 2007 has begun strongly for India. The country has continued to generate buzz and raise the interest of a wide range of investors, be it private equity, venture capital or fund managers looking for attractive returns.
According to some estimates, private equity represents about 70% of all foreign direct investment into the country.
Globally, there is a lot of liquidity in the market these days and that money has to go somewhere, says Alan Alpert, a senior partner for M&A transaction services at accountancy Deloitte.
“If you look at the future, liquidity is coming from two sources: People who lend and people who invest. There are not enough stock markets; not enough real estate to absorb all that money.”
Nowadays, large and growing markets like India and China are natural targets. Even though these countries have proven track records generating returns on mainstream investments, they are relatively new on the private equity (PE) radar. Just a few years ago, PE investors would not even consider emerging markets.
“These days, PE investment is very acceptable … you don’t have to explain it any more,” Alpert said.
Investment hot spot
This is particularly true in China, which is taking in more money by the day, much of it going into deals that give the impression of a guaranteed return. The government has devoted a lot of time to puting in place favorable conditions for growth. This includes making long-term investments in infrastructure that have given the country a considerable advantage when it comes to attracting investors.
The same has not yet happened in India, although a vast majority of the money comes from the US and the UK, and increasingly, from Asian countries. Singapore is the seventh-largest source of investment and Japan is the fifth, according to figures from India’s Department of Industrial Policy.
“What the Chinese government is doing [should be] effortless in India … The question is whether India will catch up,” said Alpert.
Going to India still presents certain risks and the more conservative analysts and investors still have some questions about the long-term viability of the Indian market. Although growth has been fairly steady for the last few years, the country’s hyperactive democracy may yet prove to be a liability. Many aspects of doing business in India are still heavily regulated – the government needs a majority to pass laws, and minority interests often play a big role in decision-making.
Yet a lot is changing right now. According to a survey of India by the Organization for Economic Cooperation and Development (OECD), annual economic growth has accelerated to an average of 7.5% from 1.4% in the three decades after independence in 1949.
A number of areas have been liberalized and have responded well, the OECD noted, particularly communications, insurance, asset management and information technology. Infrastructure sectors such as telecoms and civil aviation have also opened.
Therefore, will money from the eastern giant begin pouring into India? And conversely, will Indian investors begin flocking to China looking for business opportunities and better synergies?
Earlier this year, Indian private equity firm Capvent organized a conference in Shanghai to bring together investors from India and China. The idea, said managing partner Varun Sood, was to generate more interaction between the two countries.
Chalk and cheese
The difficulty is finding common ground, since the differences between the two countries are large and sometimes it seems that the only similarity is geographic proximity.
For example, in China, PE money tends to go to large, well-established state-owned enterprises (SOEs), whereas in India, funds are more likely to target new ventures or public-private partnership-styled business models in which both the government and private investors have an interest.
Getting involved in a large Chinese SOE often requires a level of investment beyond what Indian companies can afford, so more Indian businesspeople are focusing on smaller Chinese firms at the entrepreneurial level, Sood added.
On the other hand, Chinese investors are learning that in India, throwing money at a company does not always make operate more effectively.
“I think they don’t know how to do it [in India]. The Chinese are very capital-intensive while Indians are very capital-efficient,” said Sood. “In India you’ve got to hustle a bit, use your resourcefulness to deal with the lack of capital, the lack of government help.”
Ultimately, he believes this capital-intensive approach will have to change because entrepreneurs think in a capital-efficient manner.
“In China, this has not happened yet,” he noted. “They don’t think about bootstrapping. They don’t think about being capital-effective.”
Nevertheless, Indian companies are looking at the large pools of capital available in China. That much money going into a country which, until recently, has lacked sources of investment could potentially deliver tremendous gains.
“There is great interest in attracting more Chinese capital because India is still capital starved,” said Sood.
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