Zoo Station

It's stale news by now that India is a favourite of the large global private equity firms. The recent announcements by Blackstone and Draper Fisher Jurvetson (of Hotmail fame) to invest $1 billion and $200 million respectively in India confirms this trend. Those of us who have followed this trend know that a good part of the current interest in India was catalyzed by Warburg Pincus's exit from it's investment in Bharti Telecom. For those who came in late, Warburg invested about $300 million in Bharti in 1999. They sold most of the stake for about $1.1 billion and the remainder of their holding in Bharti is worth another $700 million today. So, if there's anyone who can explain the current fad for India, they are the folks at Warburg. Knowledge@Wharton poses the question to Chip Kaye and Dalip Pathak. In particular, I found these bits interesting.

Warburg's bets in India are hardly reckless. The firm generally sticks to the tried, true, big and stock-market listed. That is rarely a winning strategy for a private equity investor in the United States, but can be in India, where the pent-up demands of a billion people leave plenty of room to grow for even the largest conglomerates. So in India, the investment firm is not spending much time seeking out early-stage companies or funky technology. In fact a couple of its forays into tech were jettisoned. They involved minor investments, under $2 million each, Pathak says.

"Larger companies are less risky; listed companies are less risky," he says, citing the transparency afforded by India's capital markets. One other reason to pick big over small, in Pathak's view: Bigger Indian companies are increasingly seeking capital and acquisitions abroad, and if they play foul with Warburg, "they know they will never get investment abroad."

In India, Kaye and Pathak expect the thirst for capital will be unquenched for years to come. Just infrastructure improvements -- greater power generation, better highways and more efficient ports -- are estimated to require $20 billion to $25 billion in investments each year. For policy makers in India, Kaye says, the main social challenge is to lift 200 million people out of abject poverty. Infrastructure projects, far more than IT, have the potential to generate the large numbers of jobs needed to accomplish that task, he adds.

Anand Sreedharan (of Bessemer) also makes some terrific points vis-a-vis private equity pouring into India. I agree with him entirely on where the investment opportunities lie in the India market, which relates to some of the points made in the KAW interview.