Manish Kejriwal: Happy to be patient

Last fortnight when the New York-based private equity fund Kohlberg Kravis Roberts & Co (KKR) bought 85 per cent of Indian software firm Flextronics Software Systems for $900 million (Rs 4,050 crore), plenty of eyebrows were raised in the haughtily hip and high-brow universe of domestic private equity (PE). That the deal is a bombshell is evident considering it is the largest buyout ever in the history of Indian private equity, eclipsing the $500 million purchase of General Electric's Indian call centre business by General Atlantic Partners and Oak Hill Capital Partners two years ago. Also noteworthy was that it was a rare leveraged buyout-rare in Indian PE circles-funded almost totally by debt. For some investment bankers and private equity players, however, it's the price KKR was willing to pay for Flextronics that left them incredulous-KKR is apparently willing to fork out more than double what Flextronics International had paid two years ago to acquire what was then Hughes Software.

If you've got a business to sell and a story to tell, these are indeed the best of times. With the stock markets mirroring the country's economic prospects, the corporate sector's future earnings potential and the global fascination with India, prices of businesses have soared to dizzying heights. To deserve those heady valuations, companies will have to keep turning out robust performances for at least the next couple of years. If you're a winsome buyer on the prowl, the big question you've got to answer today is: Is what I am buying worth the premium being demanded? And is there scope for further appreciation in the years ahead?

The Flextronics-KKR transaction is perhaps as big as it gets, but it's precisely such prickly questions- rather than rampaging big-ticket deal-closing-that are keeping the host of marquee private equity names that recently kicked off India operations busy. After all, no PE Johnnie-come-lately to the country wants to be caught up the creek at a time when the market is arguably at peak levels. "Indian valuations are excessive by any yardstick. It is not just the multiples. Any fundamental analysis of cash flows shows the valuations to be pegged beyond reason," states Rajeev Gupta, Managing Director, Carlyle India Advisors, which flagged off its India operations in August 2005. Carlyle is among the largest PE players globally but has pretty little to show for its efforts in India, save for a $20 million investment in Claris Lifesciences, which makes life-saving drugs. And Carlyle isn't the only PE firm that's playing safe (see Waiting and Watching). Another high-profile player Texas Pacific Group has yet to open its India innings.

Carlyle's Gupta: Valuations are excessive

Blackstone, which set up its Indian office last year with a high-profile recruitment-of a Reliance honcho, Akhil Gupta-has only done one small deal so far, but could be close to sewing up a couple of deals, according to the market grapevine. And, all the noise about overvaluations notwithstanding, one section of the PE industry feels if you believe in the long-term India story, you've got to bite the bullet at some time. "Even though the markets look fully valued, the performance and potential of many companies are very strong," points out Manish Kejriwal, Managing Director, Temasek Holdings Advisors India. Kejriwal obviously has put his money where his mouth is. And where the action is too. Recently Temasek acquired a 9.9 per cent stake in Tata Teleservices for roughly Rs 1,500 crore-a big deal no doubt, but then for Temasek, which has been around for two years now, you could well argue that just one transaction doesn't make a summer. Kejriwal says Temasek prefers to take it slow and easy. "I am happy to be patient, and not overly anxious," he quips.

Neither, it would seem, is Puneet Bhatia, who runs Texas Pacific Group in India (Vivek Paul joined TPG in the us after quitting Wipro). Bhatia (who also oversees the investments of TPG affiliate, Newbridge, out of India) agrees that valuations are stretched, and that in today's market one has to pay a huge premium for growth (of the past three years and as well as in future). "Embedded growth in some of the sectors and some companies that are executing very well will still be attractive investment options," he explains.

The easier part, though, would be identifying such growth-oriented companies (the tougher bit would be to get them to agree to a sane valuation). And, as the recent action in the PE space reveals, deals are no longer restricted just to the seemingly-hot sectors like it and telecom. Today, transactions are across sectors, with real estate firms attracting top dollar: Two of the top five PE deals of 2006-one a cool $100 million buyout-have been in real estate (see Have They Paid Too Much?). What's also significant, as the Flextronics-kkr buyout indicates, is that large global buyout funds are active in India and seeking controlling stakes in local companies. "Five years ago, control was far from the minds of the relatively smaller private equity investors who first moved here," says Carlyle's Gupta.

Yet, big-ticket buyouts like the Flextronics one will be very few and far between. More common will be transactions in the $30-45 million range (between Rs 135 and Rs 200 crore). For instance, 3i, a PE player that entered last year, has announced three deals, all under the $50 million (Rs 225 crore) mark, and that's pretty much where the action is going to be in the days ahead.

Meantime, the India story continues to be a rage, with new players falling over each other to get a piece of the action. Reports indicate that a number of new PE firms such as Providence Equity Partners, Apex Ventures Partners and Lightspeed Venture Partners are keen to enter India, come hell or high valuations. Prices may look stretched at current levels, but then private equity is a long-term game. "Our perspective is long-term," says Temasek's Kejriwal. Adds Caryle's Gupta: "Private equity investors take a five to seven year view. They are not momentum investors who trade in and out." So there are those PE investors who would rather sit out the current overheated scenario, and wait for realistic and reasonable prices before moving in. The danger of such a strategy? They might be waiting for ever.