Many suggest that the growth of this new asset class is due to strong global liquidity and stability witnessed in the world economy. The upgrading of India's rating to 'investment grade' in the beginning of this year and a 9.4 per cent of GDP growth are the major drivers for private equity players. Such investors look for long-term investment options for sustainable returns over a period.

Moreover, the domestic companies have shown great appetite for mergers and acquisitions both domestically and globally. As a result, India has become a priority for the global PE investors. India came 12th in the total M&A (merger and acquisition) deals in 2006. In the first three months of this year it has climbed to seventh position.

Till few years ago, Indian industry was largely relying upon domestic sources for raising capital. But over the years, PE emerged as an alternative funding route. India's emergence as a hub for outsourcing and growing domestic consumption for goods and services has opened up new opportunities for investment.

During the early years PE investments were limited to IT, ITeS and life sciences sectors. In the last few years this list has expanded to include several sectors such as, infrastructure, telecom, insurance, retail and media, among others. For real estate companies, PE is a perfect solution since they can raise large amounts of money from such funds without going through a similar kind of due diligence as in the case of initial public offerings (IPOs).

A real-estate consulting firm expects that about $12 billion (Rs 49, 200 crore) of investment in the sector over the next 12-15 months through a mix of venture capital funds, PE funds and foreign direct investment. Several real-estate funds such as Royal Indian Raj International, Blackstone Group and Goldman Sachs Proprietary India Fund have already allocated $10.57 billion for investment in the sector.

Even the small and medium enterprise (SME) sector, which was not very popular among the PE players, has started gaining importance. In the past most of the PE investors overlooked this sector due to strict exit options from such investments. However, with the development of capital markets and M&A segment, the exit options for PE players have improved significantly. The fear of an SME being affected due to the sudden exit of the PE investor has been unfounded as PE firms exit their stakes through the capital markets. Their smooth exit does not affect the company's financials and long-term plans.

PE firms now shape corporate performance standards, governance and consolidation across industries. Most PE-backed companies do tend to follow more diligent corporate governance standards at the insistence of their investors. This is one of the reasons why several recent IPOs by Indian companies, including WNS Holdings and EXL Services, have been able to debut on the US markets and also attract better valuations on their offerings.

While IPOs are used as exit strategies by PE investors, trade sales, in which one investor sells the stake to another in a negotiated deal, continue to dominate PE exits in the Indian market. For instance, Gurgaon-based BPO Genpact has announced plans for a $600 million (Rs 2, 460 crore) listing on NYSE in what will be the biggest listing by an Indian PE-backed company. Genpact's PE investors, General Atlantic and Oak Investment, are slated to sell an undisclosed portion of their aggregate 62.3 per cent stake through the listing.

However, the industry experts say that the full potential of PE investment has not been unleashed yet. The government's decision to restrict the number of sectors for which domestic private equity funds can claim pass through status for tax purposes has begun to impact PE deal flow. In April, the first month in which the new norms became applicable, the number of deals struck by domestic PE and venture capitalist (VC) funds shrunk by almost 50 per cent. According to the data compiled by Grant Thornton, an advisory firm, only five deals from domestic funds were struck in April against an average of about 10 deals per month in the past.

The new guidelines issued by the government on overseas issue of preferential shares to restrict the flow of money into the real estate, leading to over heating of the sector, has hit the overall private equity industry. This has also affected the deal structuring capability of PE players intending to invest. In spite of these hurdles the PE market is booming and is expected to grow.