When Ind-Barath Power Infra Ltd dropped plans for a $200 million IPO earlier this year, it not only thwarted the fundraising plans of its controlling shareholder, but blocked an exit route for a clutch of private equity investors.

Those funds, including Sequoia Capital, Citigroup's venture capital arm and 3i , invested a combined $223 million in Ind-Barath and may get a breather as the firm is in talks to sell a big chunk to buyout giants such as TPG Capital and Apollo Global Management .

So-called secondary deals, when a private equity investor sells its holding to another such investor, have traditionally been less favored by buyout firms than an exit through an IPO or the sale of a company to an industry rival.

But with weak capital markets shutting off the IPO option for now and mergers between domestic corporate rivals still rare, owners of Indian companies and their private equity investors eyeing the exits will be forced to look at alternatives, including secondary market deals.

KPMG figures roughly $95 billion in maturing Indian private equity investments made during the bull market years of 2006-2008 will come up for sale over the next three years.

Logic suggests that a good time for exits is not a good time for investing and vice versa, said Raja Parthasarathy, managing director at IDFC Private Equity, one of India's largest private equity funds.

But the current environment appears to be challenging on both fronts, largely on account of continuing uncertainties around the macro outlook, he said.

In India, companies tend to want to go public, ready or not.

But India's benchmark stock index <.BSESN> is down more than a fifth this year, and 13 rate interest increases since early 2010 by the central bank have pushed up borrowing costs, slowed economic growth and made investors wary.

Private equity exits through the Indian IPO market dropped 66 percent this year to $85 million in 15 deals, according to data from VCCircle.

Overall, some $7 billion worth of public offers were either scrapped or deferred in 2011, of which $1.8 billion was backed by private equity investors, SMC Global said in a recent study.

However, secondary market private equity transactions are up 9 percent this year to $704 million in 29 deals, from $646 million in 14 deals last year, according to VCCircle data, and industry players expect that figure to grow.

SECOND-HAND SHOPPING

While private equity investors in India have generally been reluctant to sell to another buyout firm, as a partial exit through a secondary sale does not provide the liquidity that an IPO does, the current environment and pressure to exit are forcing a re-think.

A secondary sale should not be viewed as a forbidden option, as it sometimes is, KPMG said in a recent report on Indian private equity.

Secondary transactions offer relatively high returns...As the industry matures, more and more PE-funded companies will come up for sale, it said.

Recent deals include the partial exit in November by UK-based Aureos Capital, when it sold part of its $15 million investment in Continental Warehousing Corp to U.S. fund Warburg Pincus, which invested about $100 million in the company.

Earlier this year, Kotak Realty Fund, a unit of India's Kotak Mahindra Bank sold its holding in Peepul Tree Properties to local rival Tata Realty Fund for $115 million.

The KPMG study said about one-third of private equity investments in India are in the red.

In an exit environment driven by IPOs, such underperformers would indeed be hard to exit, it said.

GHOSTS OF INVESTMENTS PAST

Private equity funds invested more than $31.5 billion in India between 2006 and 2008, according to KPMG.

Assuming a five-year holding period and funds' expectations for returns of roughly three times, Indian exits valued at roughly $95 billion are poised to take place over the next three years, or $28 billion of exits per year, the study found.

By comparison, private equity funds spent a total of just $14 billion in Indian in their most active year of 2007, KPMG said.

Investors in private equity funds, known as limited partners, typically commit their money for 10 years, but fund managers generally like to turn over specific investments after roughly five years.

Fund managers are definitely under pressure...as their average holding period is increasing, said Ajit Kumar, India head of Dubai-based fund Evolvence Capital, who expects a growing number of secondary exits as the industry matures.

Evolvence has invested about $400 million in India and is raising a $400 million India-dedicated fund.

We may see improvement in secondary deal volumes in the second half of 2012. The public markets are also likely to turn better, he said.

Meanwhile, worries about the fate of boom-era investments have dampened sentiment in the fundraising market, as some 60 India-focused funds attempt to raise about $15 billion.

Investors whose previous investments in Indian private equity deals have not yet borne fruit may be reluctant to write checks to fund managers this time around.

Ironically, those investments made then are proving to be one of the most vital roadblocks confronting the industry today, said Subbu Subramaniam, who was a founding partner at Baring India before setting up his own private equity firm, M-Cap fund advisors.

(Editing by Tony Munroe and Matt Driskill)

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