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Investing in India? See Blackstone losses first

HONG KONG/MUMBAI (Reuters) - Blackstone Group BX.N has invested more than $730 million in India since arriving three years ago, only to see much of it wiped out by the country's weakening economy and stock market plunge.

Blackstone’s tough start in India is a cautionary tale to other Western private equity firms such as Kohlberg Kravis Roberts & Co. and Permira that are opening offices in Mumbai.

If newcomers weren’t already wary of India’s foreign investing rules, which forbid borrowing and set a purchase price range, certainly Blackstone’s performance so far may give them pause. Entrenched firms, too, are likely to wait before pouncing.

Blackstone is not the only private equity firm watching its Indian investments take a hit, as Warburg Pincus can attest.

But unlike Warburg and other private equity players, Blackstone is relatively new to India. It hasn’t been there long enough to sell stakes to balance losses with gains.

What’s worse, it appears to have done most of its eight Indian deals at the very top of the market.

Blackstone says it remains a long term investor in India.

“Short-term capital market volatility does not alter our investment thesis nor does it impact our commitment to an investee company,” Blackstone India head Akhil Gupta said in an email reply to questions about the portfolio.

“We are long term investors who are focused on adding value to portfolio companies over long periods of time.”

New York-based Blackstone, one of the largest private equity firms in the world, launched plans to expand in Asia in 2005, choosing India as its first destination after hiring Gupta from Reliance Industries RELI.BO to run the Mumbai-based team.

India’s economy, despite a slowdown, is still growing significantly. Companies and infrastructure projects are hungry for foreign capital. Foreign money is attracted to future growth prospects and the ability to buy into assets on the cheap.

The broader Indian market .BSESN fell 52 percent last year, its sharpest annual fall after a five-year bull run that saw the benchmark rise six fold.

How quickly the economic climate stabilizes is up for debate.

BLACKSTONE IN INDIA

Shares of Nagarjuna Construction NGCN.BO have fallen 71 percent since Blackstone agreed to invest $150 million in August 2007. Garment maker Gokaldas Exports GOKL.BO has also lost 71 percent of its value since Blackstone inked a deal that same month for $165 million.

Last February, Blackstone said it would invest $60 million in transportation company Allcargo Global Logistics ALGL.BO when its stock was at 735.4 rupees per share. Eight months later, the stock was worth less than half that amount. It's since rallied.

In addition, Blackstone has bought stakes in several private Indian companies in industries that are struggling.

Gupta said at least one Blackstone professional is spending at least a day a week at each of its portfolio companies and that the firm’s investment horizon is five to seven years.

“Most of our India portfolio is less than two years old, so we are in relatively early stages of our investment cycle,” he said.

Blackstone spent $65 million for a minority stake in Indian engineering firm MTAR Technologies Pvt. Ltd in November 2007. Gupta, told Reuters last November that MTAR’s revenues and cash flow grew fivefold.

PAPER LOSS

Not long after Blackstone launched in India, KKR paid $900 million for a majority stake in the Indian software business of Flextronics International FLEX.O. Shares have since fallen nearly 80 percent.

“Basically it depends on the time horizon. The investment outlook is likely to be 4-5 years for a typical PE deal,” said Arun Natarajan, CEO of Venture Intelligence, a local PE and venture capital deal tracking firm speaking about the industry.

“Under that assumption it is still a paper loss. They can still make money,” he said.

What makes Blackstone’s India situation difficult is the speed at which it spent money in a once-red hot economy. The firm is sitting on eight portfolio companies with few exits in sight.

New York's Warburg has invested in auto component maker Amtek Auto AMTK.BO and plastics products maker Sintex Industries SNTX.BO, both of which have struggled through India's slowdown.

Warburg also invested in ICICI Bank ICBK.BO in 2007, shares of which have plunged by more than half since the deal. Warburg declined to comment.

But Warburg's relatively long history in India, and the money it has made from certain investments such as mobile operator Bharti Airtel BRTI.BO, cushions it for the current downturn in the region.

Blackstone doesn’t have that luxury.

Editing by Anshuman Daga

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