Blackstone hasn't spent any of the $1 billion pledged for India when it entered the country in May last year because the New York-based firm found more attractive targets in other markets, said Akhil Gupta, Blackstone's chairman in India. A dedicated fund would commit the company to investing, he said.
The firm is competing with rivals such as Carlyle Group Inc. and Warburg Pincus LLC as well as hedge funds in seeking to tap a $775 billion economy the government says can grow as much as 10 percent a year. A 22 percent drop in India's benchmark stock index since it peaked at a record high on May 10 may make investing easier by bringing asset valuations down.
``Expectations have been too high,'' Gupta said in an interview in Mumbai. Now, ``people know that the rainbows they're chasing may disappear.''
The Sensitive Index surged 93 percent in the 12 months before May 10. The rally took the average price-to-earnings ratio of the 30 stocks that make up the benchmark as high as 25 times earnings, according to data compiled by Bloomberg. The drop has brought that to 17.7 times.
Indonesia's Jakarta Composite Index is at 16.1 times.
India, Asia's fourth-biggest economy, expanded 9.3 percent in the three months ended March 31, the fastest pace since the quarter to Dec. 31, 2003. Indonesia's economy expanded 4.6 percent in the first quarter, the slowest pace since 2004.
Still, the Sensex is more than three times higher than three years ago -- and companies still choose to tap the market for funds. Property developer DLF Universal Ltd. plans to raise as much as $3 billion in what would be the nation's biggest share sale, bankers involved in the transaction said last week.
``When the capital markets turn around and you're in a bear phase, there'll be a lot of investment opportunities for these private equity firms, but not right now,'' said Vishal Kampani, Mumbai-based head of corporate finance at JM Morgan Stanley. ``You're going to compete with a very strong primary market and a very strong banking system.''
Indian companies raised $9.9 billion selling stocks and convertible bonds in the first five months of this year, 68 percent of the amount raised in the whole of 2005, Bloomberg data show.
Blackstone, which manages $13.5 billion globally, has studied more than 100 potential transactions in India, said Gupta, 53, a former chief executive officer at Reliance Industries Ltd., India's largest non-state company.
``When the market goes up like crazy like it did last year, it affects our ability to do the deals,'' Gupta said.
Blackstone will raise the India fund only when it's sure it can deploy the capital.
``That could be this year, depending on the market,'' he said.
The firm plans to spend at least $25 million in any single investment in India and is seeking returns of about 25 percent, Gupta said. Blackstone will only invest in listed companies if it can get a board seat ``and some governance where our presence will make a difference,'' he said.
The firm is also seeking investments in ``all real estate sectors and all geographies'' in India, Gupta said. Real estate investors are targeting India to gain from a surge in demand for homes, offices and retail space in a nation of 1.1 billion.
Blackstone, which has a team of 11 private equity and real estate experts in India, will decide in the next three months whether it will hire as many as three more, he said.
Buyout firms such as Blackstone are facing increasing competition from hedge funds in India.
Farallon Capital Management LLC, a U.S. hedge fund, will spend more than 2 billion rupees ($43 million) to buy stakes in two units of Indiabulls Financial Services Ltd., the Mumbai-based brokerage said in January. Old Lane LLC, a New York-based hedge fund started by former Morgan Stanley executives, plans to invest in infrastructure projects in India.
Hedge funds and other investors ``paid a lot more than we would ever pay'' for some of the deals, Gupta said.
Private equity firms typically take stakes in companies that need cash to expand and seek to exit the investment over a set time frame. In contrast, hedge funds can invest for any length of time they see fit, change their investment strategy and have ready access to a pool of funds. The funds also have a higher tolerance for lower returns, Gupta said.
``Increasingly hedge funds are doing more private equity deals than private equity shops,'' said Kampani at JM Morgan Stanley, 49 percent owned by the world's No. 3 securities firm. ``They're more aggressive, they have more flexible capital.''