Bad memories: Private equity funds go slow in India

A number of private equity investors are giving India a wide berth, put off by soaring valuations. Indeed, they are still trying to exit expensive investments made months before the 2008 global crisis erupted.

So far this year, there have been 76 private equity investments in India, according to Thomson Reuters data. If sustained, it would be the third consecutive year of decline.

That slowdown contrasts with the widespread optimism in India's financial markets. Foreign institutional buying pushed share prices to a record this month on the back of easing inflation and promises of reforms by Prime Minister Narendra Modi's government. The rally has led sellers to demand even higher premiums for private equity deals.

"Valuations have dramatically increased over the last 12 months, and in some cases the multiples have nearly doubled from a year ago," said Shashank Singh, managing director and country head at London-based private equity investment group Apax Partners LLP.

Many funds are still locked into investments acquired a few years ago, often at very high premiums that were inflated by the exuberance of a broad market rally. They are now setting high IPO prices in an attempt to recoup what they invested. But the market, despite the current optimism, is not taking the bait.

Only one private equity fund - Mumbai-based New Silk Route (NSR) - has exited via an initial public offering this year, and at a lower price than it expected. NSR obtained a two-fold return on Ortel Communications Ltd, according to Thomson Reuters calculations, considered low for an eight-year investment.

Private equity-owned companies stuck in the IPO process include the airport unit of GMR Infrastructure and mobile tower operator Viom Networks. Concerns about IPOs are pushing private equity funds to look at private sales - a longer and potentially less lucrative alternative. So far this year, 10 exits by private equity investors have come via sales to strategic partners or other private equity funds, according to Thomson Reuters data.