Walkers creates SPV for India

(CNS): Local law firm Walkers says the impact of the credit problem has led to a change in direction for investors and that private equity has emerged as a popular financing option especially in India for capital investment and expansion programmes. Private Equity partner Caroline Williams explains that with a tightening on banking finance investors are reaching for new opportunities.

“The global credit crunch has tightened the availability of banking finance, forcing investors in India and worldwide to reach out to private equity funds as an alternative source of funding their capital investment/expansion programmes,” said Williams, who is based in the Cayman office. “Despite India’s recent weakened economic outlook and inflation at a 13-year high, the infrastructure sector continues to attract global equity funds. Additionally, India is realizing increased interest from offshore money, which will be invested into the national infrastructure programme over the next five to seven years.”

In 2007, India attracted more private equity funds than China, and also has more private enterprises. The high priority for development of infrastructure, anticipated to need US$500bn in the next five years, makes construction one of the most popular segments for investments. As an example, last month, Red Fort announced an infrastructure fund focused on ports and power station development that is estimated to raise in excess of US$600m by the end of 2008. The company has already closed seven deals in the real estate market worth US$200m in the first half of 2008 and anticipates investing another US$300m by the end 2008 to make a total of around 10-12 deals in 2008.

“The driving motivation for foreign direct investment inflows into India continues to be double tax treaties associated with offshore jurisdictions. Private equity funds establish wholly-owned subsidiaries in offshore jurisdictions to invest into the Indian target company,” said Philip Millward, a Private Equity partner in Walkers’ Hong Kong office. “Clients of Walkers’ Hong Kong office have established Special Purpose Vehicles (SPVs) in the Cayman Islands and British Virgin Islands to operate as holding companies for investments into India. These SPVs typically invest into underlying Indian investee companies via a wholly-owned subsidiary established in a country that has a double tax treaty with India, namely Mauritius, Singapore, or Cyprus. By creating an offshore holding structure, the private equity fund may avoid transferability restrictions on an eventual exit from the underlying investment.”

Despite some concern over valuations of Indian companies, the high growth of the Indian economy has kept it attractive to private equity.  Private equity investment has risen consistently from US$2.03bn in 2005 to US$17.14bn in 2007. And the deals are getting bigger. In 2007, 48 deals of over US$100m were closed compared to 11 deals of over US$100m in 2006.

“Private equity funds are extremely keen to identify and invest in growth opportunities in the Indian pre-IPO market. This enthusiasm, coupled with a lack of viable investment opportunities in other markets, has made private equity financing an easier source of capital than financial institutions that are scaling back their lending activities in emerging markets,” said Richard Addlestone, a Private Equity partner in Walkers’ Cayman office. “However, private equity’s insistence on taking quasi-management positions within the investee companies can be perceived as an encroachment on the funded company’s ability to independently control the growth and direction of the business. This can often lead to a focus on short- to medium-term growth to facilitate an exit for the private equity fund, not longer term strategies.”

Sovereign wealth funds ("SWF"), such as Temesek, Dubai Investment Corporation and others are also investing heavily in India.  SWFs tend to be known more for providing cash rather than management expertise. However, SWFs are evolving, hiring staff with similar skills to those in private equity houses and morphing into a type of private equity firm, themselves and so leveling the playing field.

“While India does present some challenges due to the strict restrictions of the Indian Companies Act, 1956 and the material regulatory barriers if a fund investing in India is not a member of IOSCO, we anticipate continued interest in India, and more activity from India investors,” continued Millward. “By working with a sophisticated law firm that has vast experience both in private equity funds and in the Asian markets, institutional investors and global financial organizations can leverage the power of this emerging market.”