Private equity investment in India is accelerating, as rising borrowing costs and dormant public markets in Asia's third-largest economy push companies to cut deals with buyout firms in return for much-needed cash injections.

Unlike developed markets, India offers few buyout opportunities and the bulk of the money is deployed as growth capital, with average deals in the range of $25-$100 million.

But more deals are emerging now as India's entrepreneurs slowly lower their valuation expectations and dip into a large pool of capital held by private equity.

India has the highest deal count for private equity backed M&A in Asia, with 89 deals worth $4.2 billion launched so far this year, according to Thomson Reuters data.

Analysts say limited fundraising options should keep valuations inching down, despite the amount of money chasing limited opportunities -- industry specialists Bain & Co estimate as much as $20 billion of ‘dry powder’ is looking for a home in India.

"Companies that are trying to access equity capital were earlier comparing private equity to the public markets," said Sanjay Nayar, Kohlberg Kravis Roberts & Co's head of India business.

"But equity capital markets are less accessible currently and companies that want to get the money raised are happy to access private equity," he added.

A 10 per cent slide in India's main share index and 11 interest rate hikes since March last year means companies have to look beyond public markets and bank financing for capital needs. As a result, total equity raisings in the first half fell 42 per cent from a year ago to $7.1 billion, according to Thomson Reuters data.

Earlier this month, mobile handset maker Micromax decided to pull its planned stock market listing, which was expected to raise about $150 million, citing poor sentiment.

Instead, the company raised about $45 million from private equity firms, which allowed it to avoid sharply lowering its share value to entice retail investors.

CAPITAL POOL

India is flooded with private equity firms looking for investments -- from global buyout shops like Blackstone, 3i Group and KKR, to homegrown firms like IDFC, IFCI and ICICI -- and a flurry of deals has emerged in recent weeks, as companies agree terms with buyout firms to meet capital needs.

The deals include India's second-biggest private equity investment of the year, with Apollo Global Management injecting around $500 million in Indian steel pipe maker Welspun group last month.

"There is a lot of money chasing deals in India because many private equity firms have raised huge amount of money to deploy in this country in the last couple of years," Vikram Utamsingh, head of private equity advisory at KPMG in India.

India's share of money raised for investment is still rising, according to data from London-based private equity research firm Preqin. Thirteen funds have raised $7.8 billion for direct investment in India this year, 8 per cent of the global total. In 2010, India took 5 per cent of the global total.

MUTED MARKETS

"If the capital markets remain muted in the next few months, you will see a sharp rise in private equity deal volumes. All the PEs have very strong pipelines and there are opportunities across all sectors," Utamsingh said.

Pipeline deals include TPG Capital's sale of its 20 per cent stake in Shriram Transport, a deal valued at over 30 billion rupees ($674 million), and Reliance Communications potential sale of its mobile towers business.

"Entry level valuations remain a challenge, though we are seeing a degree of softness in sellers' expectations because they do realise that they need the money and there aren't too many options," said Anoop Seth, co-head of Asian infrastructure at AMP Capital, a unit of Australia's AMP.

But tough equity markets also mean that private equity firms will find it difficult to exit from investments in the near term, Seth said, delaying decent returns to limited partners and raising of new funds.

Deal sizes are also expected to remain small.

"I don't see buyout opportunities emerging in India any time soon. It's a cultural issue, no Indian entrepreneur wants to give up control over their company and there are no distressed assets available here for buying," Utamsingh of KPMG said.