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On the Challenges and Opportunities we see in India

By : Ziad K. Abdelnour| 9 May 2010
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We believe that despite a challenging regulatory environment, strong fundamentals in India continue to offer some highly attractive investment opportunities.

After some difficult times that witnessed both the global financial crisis and an internal food crisis brought on by weak monsoons, India’s economy is surely recovering and is expected, according to world leading economists, to grow by 8% this year, buoyed by lower interest rates, rising consumer demand and a strengthening jobs market.

The good news is that unlike China, which faces structural change as it shifts from an export-driven to a consumer-driven economy, India’s growth has long been dependent on domestic demand, even as exports have risen. However, its major weakness remains infrastructure, with basic transportation, power grid and irrigation systems lagging behind those of China. In a welcome move, the government plans to increase infrastructure spending by INR1.74 trillion ($38 billion) this year and that is always welcome.

The better news is that unlike China and Brazil, which have witnessed an increase in acquisitions by local private equity firms, India attracts a greater proportion of foreign private equity firms. The country’s legal and governance systems have indeed long attracted private equity investors from around the world which bodes very well for us at Blackhawk.

Further, and since the opening of the economy in 1991, the country has seen huge improvements in both capital markets regulation and in corporate governance. The capital markets do indeed impose higher standards of governance on Indian listed companies, judged by international benchmarks; and while the regulations per se are of a high standard, enforcement has the potential to improve further.

On the same note, and since India’s banks largely avoided the credit freeze that plagued developed countries, access to capital has not been a significant issue. In turning to private equity, Indian companies are seeking partners who can bring them sector knowledge, operating expertise and access to new markets and technologies; which is exactly what we at Blackhawk seek to bring to our portfolio companies.

Looking ahead, we believe India should continue to be a growth market, with minority investments the norm. However, buyouts, currently approximately 5% of all transactions involving Indian targets, may gain acceptance longer term and this is very good news for investment groups such as Blackhawk seeking control. Exits should pick up over the next few years, as firms look to take profits on investments made between 2004 and 2006.

In conclusion, I think it is fair to say that the secular trend is for India’s economy to grow during the period 2010-2012 at significantly higher rate than the U.S. or economies in Europe. The road will be bumpy on occasion, because development is not a neat process. However, it is this very growth, together with occasional discontinuities, that will continue to create unusual profit opportunities for us and our partners.

Now, if you are given an opportunity to make only one drastic impact in India, what would it be?

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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