In the last article, I had discussed the rapid growth of resources with alternative investment classes like hedge funds, private equity and real estate. All these investors are showing growing interest in India.

While hedge funds are coming indirectly through participatory notes, a number of private equity funds are also taking an increasing interest - in investing in different avenues from venture capital to the purchase of stressed assets. And, real estate could attract even larger funds.

While domestically-managed private equity funds with foreign investors have been there for some time, ICICI [Get Quote] Ventures being perhaps the largest and the most active one, a recent development is domestically-funded - and managed - private equity vehicles. Several business houses have floated such funds, some aimed at specific segments, others more diversified, with Reliance Capital [Get Quote] clearly falling into the latter category.

Private equity attracted $ 2.3 billion of external funds last year; the amount in the first nine months of the current year is already more than twice this figure, at $ 5.4 billion.

At this rate, private equity investments, which are classified under foreign direct investments in the balance of payments, may well exceed the traditional FDI coming into the country.

Given the rapid rise of private equity investments, there clearly is a need for the RBI to track PE inflows separately within FDI while compiling the balance of payments statistics.

Private equity investments are coming in an increasingly wider segment of the economy. Initially, private equity came into India in the form of early stage/venture capital, particularly in the IT and IT-enabled services, and telecom sectors.

The success of some of the investments (Warburg Pincus in Bharti, several others in ITES, and so on) has attracted more and more players. (Warburg itself has invested almost a billion dollars in India so far.) Private equity investments have also taken place in existing, profit-making companies, particularly in the medium-size segment.

Another trend is that of private equity investment in companies ahead of their public issues.

This seems to suit both the investor and the investee company. For the former, the obvious attraction is that the exit route is reasonably assured and quick. The investee company benefits by getting a better idea of the market price for its shares, and the existence of PE investments adds to the credibility of the public issue.

Some unusual sectors are also attracting interest: $1 million in Drishtece, which is engaged in the provision of healthcare, education and e-governance services in a thousand villages. Micro-credit is also attracting private equity. Lately, one has seen private equity funds taking over management control in a few Indian businesses - for example, Leela Scottish Lace and Nilgiri Dairy.

The most recent segment to attract private equity is in the purchase of stressed assets, from asset reconstruction companies, who have acquired them from the banking system.

The purchase of OCM Textiles by Wilbur Ross from ARCIL is a case in this point. This was a Rs 300 crore (Rs 3 billion) transaction, inclusive of a take-over of Rs 130 crore (Rs 1.3 billion) debt.

In fact, in much of east Asia including Japan and South Korea, a huge amount of private equity has come in this segment, including for the purchase of weak banks. Incidentally, the Ross funds are interested in other investments in the country as well, and it has a joint venture with HDFC [Get Quote] specifically for managing funds for investing in stressed assets. (A couple of years ago, Ross made a packet purchasing and consolidating weak/sick steel companies in the US, before selling them to Mittal Steel.) Apart from OCM, the restructuring of Pennar Aluminium and 3D Technopec have also attracted private equity funding.

Potentially far larger funds could come in the residential and commercial real estate segments. In many ways, these would be a positive development once there is policy and regulatory clarity. For one thing, this has traditionally been the sector in which unaccounted money has played a huge role.

Hopefully, the presence of foreign institutional investors would help curb such malpractices, and also help to professionalise the development of real estate. For a long time, the core competency of the "builder/developer", certainly in a city like Mumbai, lay in finding his way through the various approval processes, and not in constructing better buildings.

In other words, FII/PE investment in real estate has a much wider dimension than speculation in real estate market, or overheating of the sector. Incidentally, in my column dated July 31, I had argued that SEZs seem to be attracting a lot of interest and investment from Indian business houses, more as a real estate ploy than anything else. It is gratifying to see that many others, including the RBI, seem to be agreeing with this.