India is considered one of the most challenging markets globally for private equity investors. According to numbers shared by Chennai-based research and services firm Venture Intelligence, after the boom in 2007 which saw 523 PE deals totaling US$14.3 billion, the industry dipped to 287 deals totaling US$4 billion in 2009. While it picked up in 2011 to 494 deals totaling US$10.4 billion, last year it again saw a dip to 438 deals and investments of US$8.9 billion.

So where is PE in India headed? Debating this at a recent event hosted by Venture Intelligence in Mumbai, industry players said that given India’s inherent economic strength, the PE industry will bounce back — but PE firms will have to play a more responsible role.

Pointing out that PE is very nascent in India, “seven to 10 years at best since it has gained scale,” Neeraj Bharadwaj, managing director of Carlyle India, noted that until now, the returns have not been very positive for most funds. “People have had one-off exits; at the fund levels, performance has not been that great…. But I see that changing. I think we are at a watershed moment.” According to Bharadwaj, volatility in the public market has made fund raising there difficult, especially for large amounts, so “more big deals and reasonable valuations” are expected to happen with PE.

Bharadwaj added: “A very interesting trend in India is that [there are] many more buyouts happening — multinationals looking to divest their Indian businesses, first-generation entrepreneurs willing to let go of their businesses and not necessarily passing it on to the next generation. I see these as positive trends for private equity; PE 2.0 will be a lot more positive than PE 1.0.”

According to K.P. Balaraj, cofounder and managing director of WestBridge Advisors, unlike earlier, “there is a huge focus on more reasonable valuations. Both entrepreneurs and investors are now looking at a win-win partnership.” Balaraj suggests that “investors who invest in funds are still excited about India.” He expects that in the next five-to-ten years, there will be another PE boom in India, but of a different kind. “On the local side, there will probably be smaller, more focused funds — maybe more mid-market funds, health care or consumer funds. And there will be the very large global franchisees — Blackstone, Carlyle, Sequoia — who will build a far more diversified portfolio.”

Akhil Gupta, senior managing director and chairman of Blackstone India, emphasized the responsibility of the investors. “We have to play the same role that venture capitalists played in Silicon Valley. It was not just money that they gave. It was the guidance, the network, the governance practices. This role is important for us because the opportunities for the promoters [in India] are way beyond what they imagined five years back.” Gupta also stressed the long term potential for PE in India. “We have to be patient. The India story is three steps forward, two steps backwards. But I think it will change…. A billion people’s aspirations will drive the country’s growth. If I take a dynamic view, I remain bullish.”

Ashish Dhawan, cofounder of Chrys Capital, however, raised concerns over the issue of governance in this space. “What has bothered me in the 13 years that I have been active in this segment is that I didn’t see any improvement at all in corporate governance. In fact, it may have declined for a period of time when lots of money was readily available. That tide has to turn. If minority investing has to be successful, then corporate governance has to improve.”