Private equity makes inroads in India

By Rina Chandran

MUMBAI (Reuters) - Private equity is gaining greater acceptance in India where rising borrowing costs and a tanking stock market have shut down other means of funding, forcing family-owned businesses to tap a source they had once shunned.

"It's a question of survival now," said Vishal Sharma, chief executive of Tuscan Ventures, a private equity firm focused on logistics, which has closed three deals in the past year.

Indian companies have in recent years embarked on ambitious expansion plans, bolstered by plentiful cash and low interest rates as the economy grew nearly 9 percent annually.

But a global credit crunch and soaring commodity prices have taken a toll of late. Inflation has climbed to its highest in more than 13 years, driving interest rates to seven-year peaks. Economic growth is expected to moderate this year, while the stock market has fallen nearly 30 percent in 2008, beating down company valuations.

"The tough times are forcing firms to evaluate their business plans and look for help to ride out the storm," Sharma said.

Private equity investing in India and China held steady in the first half of the year, the Asia Venture Capital Journal said, with India seeing a 3.2 percent rise to $6.8 billion, and China registering a 3 percent gain to $5.8 billion.

Indian private equity deals typically involve little leverage, and private equity (PE) firms have often done growth capital deals and late-stage investments, buying small stakes in private and listed firms.

Still, private equity firms have had a tough time convincing family-owned businesses to surrender some control in return for cash, especially as a six-year bull run meant these companies could get generous valuations from the stock market.