Though it accounts for just 12 per cent of the total Asian private- equity market, India is the region's fastest growing, with a 51 per cent annual growth rate compounded since 1998. During the first half of 2005, private-equity investors poured $733 million into 81 transactions, surpassing the total number of deals for all of 2004 and on track to reach a record $1.5 billion for the full year.

There is little mystery about why US and European private-equity fund managers find India so appealing. With GDP growth averaging some 7 per cent annually for the past five years, the subcontinent rivals China as Asia's most dynamic economy. India's state-owned companies are spinning off non-core assets as they pare down to meet global competition, creating a large pool of potential acquisitions for deal-hungry offshore buyers. And South Asia offers private investors advantages China cannot match, including: the world's second largest English speaking population; a transparent system of commercial law; a bustling entrepreneurial culture; and, by comparison to other emerging economies, a robust equities market that now tops $450 billion in total capitalisation.

Even more beguiling for private-equity portfolio managers are the eye-popping returns their pioneering peers have scored in recent months. In the first half of 2005 alone, a dozen high-profile sales netted private-equity players some $1.1 billion. Leading the charge was Warburg Pincus, which parlayed a $300 million investment it made in 1999 in Bharti, India's leading mobile telecom provider, into a profit of some $560 million through the partial sale of its stake in the company. In so doing it reaped a bounteous internal rate of return in excess of 40 per cent.

Riding on these winds of opportunity, a monsoon of cash is descending on India. Today, some 50 funds with some 250 billion Indian rupees to invest are scouring the country for deals. Among the newcomers are some of the most prominent names in global private-equity finance. The Blackstone Group, for example, is earmarking up to $1 billion for Indian acquisitions, and the Carlyle Group has launched three new Asian funds totaling $1 billion, and dispatched a team to scout for promising prospects in the subcontinent.

The sector certainly has head room to grow. Using the benchmark of private-equity deal value as a per cent of GDP, Bain & Company estimates that India has the potential to expand deal value four fold. Yet, for all of its undeniable appeal, India is anything but a sure bet. For one thing, the sheer size of those capital inflows risks driving up bid prices and quickly exhausting the supply of attractive acquisition targets.

To avoid disappointment, international private equity investors will have to exercise rigorous deal discipline. They will need to select target companies with an eye to capitalising on global growth trends that complement the other holdings in their portfolios. They will ally themselves with innovative managers and partners, who understand the local rules for navigating this fast changing market. And they will develop flexible exit strategies that help cushion them from the volatility of India's still-immature capital markets.

So, where should private-equity firms place their bets? Some of the best opportunities lie with India's already established and fast-growing sectors. Based on our knowledge of the market, our recommendations are:

Buy a private stake in the global economy's back office.
The educated labour force, high band width telecommunications, and technological savvy that have transformed India into the global economy's back office present especially attractive opportunities for private-equity investors. PE funds can win two fold by targeting the business-process outsourcing and IT-enabled service centres that have sprung up in suburban office parks ringing every major Indian city. For one thing, the sector is sure to grow, as leading multinationals continue to relocate their call centres, data processing, accounting, and IT-customer support functions in low-cost offshore service centres. For another, PE funds can use such holdings to streamline business operations of other companies in their portfolios.

That's the bet that US private-equity firms General Atlantic and Oak Hill Capital Partners made when they teamed up last year to pay $500 million for a 60 per cent stake in General Electric Capital International Services (Gecis). GE established Gecis in 1997 as a captive offshore business and technology centre to support its own back-office processes. From an initial site outside Delhi that employed 350 people, Gecis blossomed into a 17,000-employee globe-spanning enterprise, serving more than 1,000 GE operations worldwide.

GE benefited from the efficiencies and cost savings Gecis helped it achieve. But the unit's value to GE as an asset was reaching its limits, with the burden of managing the non-core holding. By selling a controlling stake in Gecis to General Atlantic and Oak Hill Capital, GE could continue to outsource business and IT processes under contract and harvest the appreciated value it had built in the company. For their part, the new private-equity owners hope to fuel Gecis's continued expansion by marketing its services to companies wanting to offshore their own work to a state-of the-art service provider in India but reluctant to entrust critical business processes and proprietary data to a captive GE unit. Since acquiring Gecis, the new owners have locked in long-term contracts with a wide range of banking, insurance, healthcare, and manufacturing companies that are expected to boost the company's revenues by some 25 per cent this year.

Meanwhile, General Atlantic can use its stake in an Indian outsourcer to boost the performance of the 50 other companies in its portfolio. By enabling all of the companies it owns to tap into the services available through its offshore business process and IT facilities, the private-equity owner is growing economies of scale and squeezing overhead costs out its other holdings. With the profit lift from such savings General Atlantic is in a better position to bid more aggressively than its competitors when attractive new investment opportunities come along.

Look for depth in the local management pool.
Creating the right management team has always been a key to success for private-equity funds. But while India's economic boom is helping to train a talented generation of engineers and mid-level managers, there is still a dearth of seasoned managers with track records building world-class companies. Finding and motivating senior managers who can move easily within the informal local networks that bind India's business culture and are equally at home in the fastpaced global deal-making environment is a major challenge.

But it can be met. Warburg Pincus found both a world class opportunity and managers with the skill and will to seize it at Radhakrishna Group, a privately held food distribution and logistics services company. The company was established in 1966 and is headquartered near Mumbai. CEO Raju Sheté, who took command at age 17 after the death of his father, the company's founder, grew Radhakrishna from a start-up that provisioned ships into India's largest food conglomerate with interests in wholesaling, distribution, supermarkets, catering, and, as the operator of a chain of McDonald's restaurants, fast-food franchising.

With its investment of $50 million for a 25 per cent stake in Radhakrishna in mid 2003, Warburg Pincus teamed up with Sheté, now just 40 years old, for what the Indian media dubbed the "business opportunity of the new millennium". Providing technical and financial advice as minority shareholders, Warburg Pincus will work with Sheté to implement a farm-to-plate reorganisation of the food supply chain. Their aim is to overcome the fragmentation and public health barriers that have stood in the way of India's development of a modern food harvesting, processing, and wholesale and retail distribution system. The private-equity partners are also collaborating with Sheté and his team to combine their indepth local knowledge and global connections to open doors that will enable Radhakrishna Group to expand its commercial food service and distribution network into southern Africa and the Middle East.

Plot a flexible path to the exits.
US-based private-equity firms usually think in terms of a three-tofive year holding period for the companies in their portfolios. But as anyone who has experienced the Asian currency crisis in 1997, the popping of the tech bubble in 2000, and any number of local financial rumbles in between, can attest the still-immature Indian markets do not lend themselves to even that coarse grained calibration. A crude "buy, bleed, and bail" approach that relies on lots of leverage and the luck of market timing is not a sustainable route to profits in this environment. Private equity investors who target their acquisitions in India's most promising sectors and work from a blueprint that allows them to identify and unlock value, by contrast, are likely to be rewarded with both buoyant business growth and superb market returns.

Barings Private Equity Partners, the London-based buyout firm, recently discovered the importance of patience when it was forced to postpone a plan to sell off a 36 per cent stake in Mphasis, a business process outsourcing firm it purchased in 1999. A dip in Mphasis' performance in 2004 had forced the company to lower its earnings forecast for 2005, weakening interest among a group of other private investment firms that Barings was looking to as prospective buyers. Having to pull the sale was a setback for Barings general goal of unwinding its positions in companies it owns within a four-to-seven year time frame. But Barings' investment approach in India rests in equal measure on finding companies that have strong and sustainable growth prospects. And with both Barings and Mphasis' management sticking to their forecast that the company's revenues and earnings will increase 25 per cent and 30 per cent, respectively, in the 2005-2006 fiscal year, the investment firm's overarching strategy looks to be intact.

Barings Private Equity's portfolio managers might take heart from the experience of their peers at Warburg Pincus. Less than a year before Warburg cashed in on its $700 million investment in Bharti, the cellular telecommunications firm in had been underwater.

The definitive version of this article is available at www.blackwell-synergy.com