Online riches

Online boom reboots private equity in India

Private equity is rebooting in India. Even as billions of dollars remain stuck in investments from the last cycle, a record year of fundraisings and deals is underway. One reason is that new players have flocked to cash in on the country's online boom.

Investments into private equity have already totalled $9.5 billion in the first six months of the year, data compiled by Bain & Company shows. At the current pace, volumes will exceed the record $17.1 billion the consultancy says was invested in 2007. New fundraisings are booming too.

With investors lured by the promise of Alibaba-like returns in a potentially huge consumer market, e-commerce is the showstopper. An investment by an affiliate of the Chinese giant into the owner of mobile wallet Paytm claims the spot as the biggest private equity investment so far this year, worth $635 million. New financial backing for taxi-hailing app Ola comes in next.

Bain data also shows that three of the 10 largest private equity deals historically involve online marketplaces Flipkart and Snapdeal, companies that are still potentially years from becoming profitable.

Such investments are traditionally left to smaller venture capital players because they are more risky. Yet everyone from large listed companies like Japan's SoftBank to sovereign wealth funds and asset managers like BlackRock are also piling into the new boom. Larger private equity players might eventually be tempted to join in too as they already have elsewhere, following KKR and Anchor Equity Partners agreement in April to invest $360 million into South Korean online retailer Ticket Monster.

The worry is that online will become the industry's new bubble. In the last boom it was expensive, capital intensive, infrastructure-related investments which ended up in every major private equity portfolio. They represented 43 per cent of the $77 billion invested in Indian private equity deals between 2007 and 2013, according to McKinsey.

Exits from the infrastructure craze, especially via flotations, have been much slower than the industry average. Secondary sales to rival private equity groups have become the single largest exit route for investors dragging down returns. Investors must hope India's private equity reboot will programme itself a different ending.