Carlyle bets on patience for India investments

US private equity giant Carlyle Group is betting that patience will be rewarded in an Indian market where global players have had to content themselves almost exclusively with deals for minority stakes.

India’s family-run and entrepreneur-driven firms have long been reluctant to sell-out, preferring instead to raise money by going public or through bank borrowings. Private equity firms have adapted their strategies by providing growth capital or investing in companies that are already listed.

“We don’t have a ‘runs on the board’ approach. We are quite happy to sit on the sidelines and wait for the right deal,” said Devinjit Singh, a managing director at Carlyle.

“And if we get the right deal, we go hard after it and are willing to put substantial capital behind it,” he added.

Carlyle’s biggest India investment since setting up office in 2005 is for 5.6 per cent of HDFC, India’s top mortgage bank. Carlyle paid roughly $650 million in 2007 for a stake in the listed lender, now worth a double, at $1.37 billion.

Also, Washington-based Carlyle has bought stakes in a handful of smaller Indian firms through growth funds, a strategy it will continue to pursue alongside its hunt for bigger targets. The firm’s $2.55 billion Carlyle Asia Partners III fund closed in April.

“We hope to deploy a sizeable amount of capital in the market. We have a $2.5 billion fund that still has a lot of dry powder,” said Singh, who joined Carlyle in 2008 from Citigroup, where he had headed merger & acquisition for India.

Private equity activity is surging in India, with $6.57 billion invested in the first three quarters of 2010, more than double the $2.5 billion invested during the same period last year, according to Venture Intelligence, a research firm.

A mainly foreign fund inflows-led rally has pushed the benchmark stock index to 33-month highs this week. It had been accompanied by a rise in valuation expectations in private equity deals, industry insiders have said.

Buyouts in India are rare, however, with just six such deals this year worth a combined $84 million, according to Venture Intelligence. Private equity buyouts are also scarce in China.

“We think over the next one or two years a buyout market will emerge,” Singh said. Opportunities for full buyouts in India would be driven by generational succession in family businesses, a preference among some entrepreneurs to exit companies instead of diluting their stakes by raising capital, and a consolidation of focus within India’s diversified conglomerates, he said.

“Some of the mainline businesses within the conglomerates have become so big,” he said at Carlyle’s offices in suburban Mumbai. “The logic for divesting them is a lot more compelling. Whether they do it or not, no one is holding their breath.”

He said preferred sectors include domestic consumption plays, infrastructure and information technology.