The U.S. private-equity establishment is falling in love with India. Although the trend began a decade ago, it has accelerated lately as the fast-growing Indian economy has started to outpace its domestic financing options. The latest expatriate on the scene is restructuring impresario Wilbur Ross, who said this week that his WL Ross & Co. will join the country's biggest mortgage company, Housing Development Finance Corp., to invest in corporate turnarounds. With help from the $9.5 billion development bank, Ross will do what he does best: take runs at special or distressed situations, such as bankruptcies, spinoffs, reorganizations, privatizations and other special situations. Why India? The country badly needs money to maintain its more than 7% annual economic growth. Private equity sees an especially good opportunity to streamline a famously inefficient corporate culture and realign its interests to shareholders. The allure is enhanced by the dearth of opportunity at home. "Some deals can't get done in the developed countries due to excess of capital chasing the same deals," says Anil Suri, alternative investment strategist at Merrill Lynch. "In India, there is a relative scarcity of capital. Many deals can be done on better terms with better prospects." To be sure, India presents challenges to private-equity investors. The biggest is the immaturity of its local markets, particularly for bonds. "India does not have a mature debt market at the present," says Daniel O'Donnell, chair of the private equity group at law firm Dechert. Until one exists, O'Donnell says, buyout shops will have to operate by raising some of their money in overseas forums. "There are plenty of examples of the U.S. debt market being successfully combined with the European debt market in order to enable U.S. private-equity sponsors to do very large European deals," he says. The same could happen in India as a precursor to the development of better domestic markets.
"If a couple of transactions by a Blackstone or someone else can be accomplished, then I think it will happen," O'Donnell says. In a statement, Ross said a new restructuring law and proposed rules governing the sale of debt in secondary markets make the country more welcoming for his kind of investing. "India's distressed debt market is unusual in that there are tens of billions of dollars of distressed loans in an economy that is growing at more than 7% per annum," he said. Ross already has contacts in India through his dealings with steel tycoon Lakshmi Mittal. The Indian native, who controls Mittal Steel and is the third-richest man on the planet according to Forbes, bought International Steel Group, a company fashioned by Ross last year, for $4.5 billion. Other private equity firms have recently beefed up their presence on the subcontinent. In August, the Carlyle Group opened an office in Mumbai that houses two teams that invest $1 billion in assets over three funds. The shop recently nabbed Rajeev Gupta, the former head of investment banking of DSP Merrill Lynch and the founder of its M&A practice, to oversee the Carlyle India buyout team. "We see great opportunity in India. Our growth capital investments have done well and we expect to put significant resources to work in India in the coming years," said Shankar Narayanan, the managing director who heads Carlyle's India Growth Capital team. Another firm, Warburg Pincus, continues to build a major presence in India. The company has scored a couple high-profile coups there in the past decade, including its investment in British Airways spinoff WNS and a 1999 investment in telecommunications company Bharti, where a $300 million stake has reportedly doubled. In May, the Blackstone Group announced that Akhil Gupta joined the firm's private equity group as a senior managing director to head up a new initiative in India. The firm also opened a new office in Mumbai and Gupta became chairman of Blackstone India.