Since we’re on the topic of Private Equity in emerging markets, here is an excellent interview with Rahul Bhasin, the Managing Partner of Baring Private Equity Partners (India). Much has been said of the increased committments that LPs have made, and are looking to make, towards the BRIC countries. But is it all misdirected at this point?
Some of my favorite excerpts from the article include Rahul’s views concerning the subject of the size of Private Equity in India:
The industry is five times too large.
We had $20 billion of investments in an $800 billion economy year before last (2007). That’s roughly 2.5% of our GDP (gross domestic product). The highest ever that the US reached was 1.4% of its GDP. Out of that 1.4%, more than 80% was taking public companies private, an opportunity that is not available in India. In China, the absolute investment numbers are similar, except that GDP is three-and-a-half times the size of ours.
The second issue is the explosion of private equity firms. There are 540 funds (active in India). I got this from one of my investors who tracked the number of people who tried to raise money from him, and includes private equity, venture capital and real estate funds. I don’t think it will be a significant exaggeration. Is the market deep enough for 50? I doubt it.
The rising tide raises all boats but when the tide is going out, and there is no ambiguity that it is going out, I think a lot of private equity firms who should not have existed in the first place will not exist. May be it’s five times too large and this means that 70-80% of the funds that exist today will not exist five years from now.
He made another excellent point when speaking about the U.S. buyout firms setting up shop in India:
I find it quite amazing (that they are setting up here). When I read articles about their intents, etc., my summary of what they seem to be saying is that “we have problems in our home markets, there is a crisis, there is an issue with our business model, therefore we will go to India”. I wouldn’t call it a positive vote on India. It’s more like saying “I don’t know what’s going on in my home base, let me go to some other market.”
I found that last bit to be the highlight of the article. Substitute any of the emerging economies’ names in for India and the point remains just as clear. In an attempt to avoid the nasty morning after of one bubble bursting, is the industry simply creating another in “newer” PE markets?