Private equity in India: What went wrong?

From the heading, it must be pretty clear to you that Private Equity in India isn’t exactly the hottest destination right now for thrill-seeking adrenaline junkies i.e. top MBA graduates from across the world who were hoping to get back home and make some serious cash.

But it wasn’t always like that. There was a brief period when the private equity in India was considered by the big global PE firms as the hottest alternative to the conventional, over-saturated and beaten-to-crap-by-the-recession markets (read, USA).

If you are heading to bschool or are attending one, this post should give you a quick flashback of what happened in India, and why it happened. Equip yourself with some history lessons that’ll help you break the ice during the interview with your new recruiter (possibly a partner in a top private equity firm in India, for all we know).

How & when the boom phase started for private equity in India

Ignoring all the hoopla that surrounds the industry, you’d be surprised to know that it’s less than a decade old. Of course, it did exist earlier, but till about 2004 it was a little baby sucking on its thumb (and a few modest sized PE funds for nutrition). Then it caught the attention of some (really) rich folks from the developed markets, who saw it as a powerful cash cow in the making.

Lauding the vast growth potential of the fledgling industy, they did what any rich, capitalist stranger who doubles up as a caring care-taker would do. To satiate the baby’s appetite they gave it growth hormones, in the form of billions of dollars.

Our little hungry baby who hadn’t yet become familiar with nutritional columns and Shilpa Shetty’s rejuvenating (can we add uplifting?) yoga videos lapped it all up, without knowing what damage that additional fuel would do to its natural growth.

By 2007, the international funds pumped in a huge amount into private equity in India. Around 300 Private equity funds in Mumbai, Bangalore, Delhi and other key cities had raised about $20 Billion.

The baby’s body grew rapidly, but the brain didn’t. That was the beginning of the downside.

How & when the boom ended for private equity in India

Get ready for a little bit of economic theory (just a little bit though as it’s important to understand what happened next).

What happens when there’s a lot of money in the hands of buyers, while the availability of good products in the market hasn’t changed? The same product becomes more expensive.

The products here are the companies that Private equity funds invest in. The number of potential investment targets did not change, with the influx of easy money. So the price tag on each company (i.e. valuation) shot up.

In a regular economy, what would you do if something was too expensive? If it is not an essential commodity, you’d wait…till the price came down.

However, for private equity funds in India, it was an essential commodity. They had to invest. There was pressure from the headquarters, from the limited partners, from the fund-of-funds to roll up the sleeves and jump into the action, however mindless it was.

So what went wrong with private equity in India?

Economic theory aside, greed, pressure, ignorance and impatience played a key role in what followed.

– The regular process of digging deep to find out more about the investee companies (the technical term for it is ‘due-diligence’) started getting diluted.

– There was a copy/paste mentality of trying to approach investments in India like they were mature companies in the west.

– The industries that could absorb big money were infrastructure, real estate. But there were issues related to processes, transparency & governance (all very critical for PE investments). Industries like technology, healthcare were all in the fray, but they weren’t superstars.

– There was very little cultural overlap between the guys running the show (entrepreneurs who had grown from the grass-root level) and the folks pumping in money (the elite, super MBA grads from the top bschools)

– In the west, the private equity funds played with leveraged buyouts (investing in troubled companies, changing the management & the operations, and exit with a profit). In India, anything and everything was fair game, as the idea was to ride the growth wave – i.e. make investments in smaller (but growing) companies and sell it off later.

– The little babies who were now pumped up, started believing they were related to The Hulk and started punching above their weight.

All this started having a snow-ball effect. Around 2012, there was an over-supply of private equity funds in India and a very small chunk had been gainfully invested. Private equity in India was letting go off its excess resources (not money, but people). Folks from the best consulting firms and investment banks who had left their stable jobs in search of some PE nectar had to move back to more stable shores.

What does the future hold for private equity in India?

Looking into our crystal ball, and business publications, there seems to be some more rock-and-roll ahead, before things will become normal. With the 10 year horizon looming for many deals, many PE funds that are sitting on over-valued investments would be hoping to exit soon. And that won’t be a smooth affair. Watch out for some crazy Mergers & Acquisition (M&A) deals, crazy sales, crazy negotiations. In short, yes you guessed it, a little more craziness.

After that the cowboys will hopefully rein in their horses, and play safe in the next investment cycle. Maybe they’ll start offering less risky growth money (debt). Hopefully, valuations will come back to normal.

Hopefully our little baby Hulk will get a second chance to grow up.

Now a little piece of warning. All this baby Hulk business is just to keep this post entertaining for you and for me. When you are talking about this in the interview with your next boss please remember to use regular business terms or he’ll start wondering who’s feeding you all this bizarre stuff. And also a good idea not to think about Shilpa Shetty’s yoga postures during the interview.

Did you find this analysis wala post useful? We introduced it as an experiment. Let me know if it was too academic, or just fine.

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Sameer Kamat //
Sameer Kamat
Founder of MBA Crystal Ball. Author of Beyond The MBA Hype & Business Doctors. Here's more about me. Connect with me on Google+ | Twitter | Facebook | Linkedin
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  1. Shailesh says:

    Good post! Simple, entertaining and still teaching you something that will remain with you.. because of the Jargons used (like Shilpa Shetty’s yoga etc.)

  2. Sameer Kamat says:

    Glad you liked it, Shailesh.

    With due respects to Kapil Sharma, Shilpa Shetty would’ve never imagined that her movie career, her marriage with Kundra-ji, her Yoga videos would all culminate in her appearance on MBA Crystal Ball.


    Excellent write up….what use of satire and amazing comparisons… Private Equity is my research your article has given me some new directions…Thank you so much.

  4. Sameer Kamat says:

    Thanks, Sanchita. Glad to see that you liked it and took the pains to mention that.

    [Hoping others take the cue and start commenting as well.]

  5. pritesh says:

    It wasn’t too academic as you haven’t used too many jargon which many bloggers tend to do. That’s why i liked this post.

  6. Manas Agrawal says:

    Good read. Do continue

  7. Aj says:

    Concise and to the point!
    Please write on more topics.

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