After a heady pre-crisis golden period, India’s private equity sector appears to have reached a crossroads, marked by smaller funds and a lack of exit opportunities for PE firms.

Last year, a total of $5.3 billion was raised for 27 India-focused private equity funds which reached a final close during the year, according to data provider Preqin. This contrasts with $13.2 billion of commitments raised by 49 funds during the industry’s peak in 2008.

While a slowdown in the global economy has impacted capital-raising efforts by many funds, India’s trough contrasts with China, where an all-time high of $27.5 billion was raised by 98 mainland-focused funds last year.  

In the property private equity sector alone, China raised $3 billion in 2011, compared with $700 million garnered by India. 

The disparity is attributable to a number of factors, says Mitul Patel, manager of Asia research at Preqin. They include a willingness by large mainland corporations to allocate to private equity, a wider range of PE deal opportunities in China, and moves by the Chinese government to encourage private equity investment.

One industry veteran notes bluntly that China has generally generated stronger deal returns than India’s more “mediocre” yields.

Another major sticking point is the difficulty in exiting from PE investments in India, say market observers. According to KPMG research, private equity exits in China amounted to $8.7 billion in 2010 – almost twice the $4.5 billion in India.

KPMG believes India’s “less encouraging” exit environment is due to volatility in capital markets, inflation and high interest rates. However, China has had similar conditions, albeit against a backdrop of a rising yuan, while the rupee has depreciated.  

Despite the discrepancy, China and India lead Asia’s PE market. China led the region in the first quarter of 2012, with 125 private equity deals worth a total of $2.05 billion, Thomson Reuters data shows. India was second with 144 deals collectively worth $1.4 billion. Together, the two markets account for about 85% of the $4.07 billion in Q1 private equity deals for Asia ex-Japan.

The two nations also face similar economic challenges, with market volatility and a slowdown in GDP growth expected in 2012.

On the brighter side, the Securities and Exchange Board of India has recently taken over private equity regulation in the country, which “should give investors more structure and security”, says Patel at Preqin.

Additionally, one secondary private equity investor says it is seeking deals in India, where attractively-priced assets are being sold by PE firms that urgently need to exit portfolio holdings.

“India has shown signs of recovery, in terms of capital raised by private equity funds investing in the country,” says Patel. He notes that as of May 31 this year, India-focused PE funds raised $4.9 billion – nearing the 2011 total of $5.3 billion and exceeding the $4.6 billion raised in 2010.

However, the subcontinent – which is the focus of 85 funds in the process of raising $17.6 billion – still has far to catch up to China. Capital-raising for PE investment in the mainland, by 140 funds, appears set to reach another record high at $53 billion this year, according to Preqin.