Swatick Majumdar, Managing Director, Chatsworth Securities LLC, a US-based investment banking firm, says, India should open its debt market to make its fund portfolio more attractive. This move will go a long way in filling the $1-trillion infrastructure investment gap during the next Plan Period, he says. Chatsworth Securities offers financial advisory services to firms in mergers and acquisition, debt and equity underwriting, IPOs, private placement, in addition to equity research and securities brokerage services. The company has participated as an underwriter and raised over $2 billion for traditional and alternative money managers. Recently, Chatsworth Securities, LLC announced a strategic relationship with IMaCS Virtus Global Partners to provide investment banking and advisory services to investors with interest in the Indo-US business corridor. Majumdar, who has 16 years experience in the financial industry advising international M&A transactions, says, in an interview to VCCircle, India should eliminate the disparity in its GDP contribution by different Indian states to make it more attractive like a China-type investment destination. Excerpts:-
What is your assessment of deal-making activity in the Indo-US corridor?
US-India cross-border activities are picking up after the slowdown in 2008-2009. According to a report by Grant Thornton, there were 68 outbound deals from India worth over $13 billion and 31 inbound deals worth over $1 billion during January-April 2010. Compare this to 20 outbound and 22 inbound in the same period in 2009. Majority of these deals were in the US-India corridor. As the economy stabilises and there is more clarity, businesses are trying to make up lost time by picking up synergistic opportunities.
What does Chatsworth’s tie-up with IMaCS Virtus Global Partners aim to deliver in the long term?
Chatsworth and IMaCS Virtus Global Partners collaborated to provide investment-banking services to companies that target this corridor. We have identified growing interest among investors with respect to the specific sectors in India. Both our firms possess a great understanding of the business environment and capital markets in the US and India and are well-connected with companies, financial institutions, governmental agencies, and private equity firms in both markets. We see this tie-up to aid substantial numbers of deals in the coming years.
How does the US investor perceive the current growth potential of the Indian market?
It is very hard to ignore India as an investment destination even when the country does not receive the same level of investment dollars like some of its neighbours like China. The situation does seem to change now. Funds that previously were looking at India as a hedge against China are warming up to the equation that India presents fair value, double-digit corporate and GDP growth and a robust public market. A recent IMF study showed that India’s GDP growth for 2010 would be 8.75% and 8.5% for 2011. The issue, however, is that there are only a handful of states in India that are growing at double digits. These states pull most states that have low single digit GDP growth. I believe once all states manage to contribute, India will witness a China-type GDP rate. An equal contribution from all states is critical for pushing further the India growth story.
Which sectors, do you think, will drive investment flow?
According to the recent CII-KPMG report on PE investments, micro, small and medium enterprise are expected to play a critical role in India’s growth story and will continue to be a significant target for VC/PE investments. I believe this to be true to a large extent. India has a very vibrant VC/PE industry with $32.5 billion invested across more than 1,500 deals from January 2006 till date. Over the last three years, VC/PE investments were the equivalent to a very high percentage of the total equity raised from primary markets. Micro, small and medium enterprises are expected to continue playing the critical role in this.
For the last several years, sectors such as IT, pharma, construction, real estate and energy ruled. But, today that is being complemented by investments into education, hospitality and infrastructure enabling sectors.
There is clearly a need for investments in hospitality sector and we see more US investors looking at this space. Automobile and auto ancillary is another sector that has tremendous upside.
Does the US investor view India’s growth as a sustaining one?
I would say that India is looked upon as a favoured investment destination not just a flavor of the month and my prediction is that, in the next five years, India will be a preferred destination. The Indian government should create safe and transparent environment and corporate governance at the company level should get more stringent for investors to feel comfortable. We see much action happening in these lines.
The VC sector business model is somewhat broken in the US due to lack of liquidity as new funds have not been raised just like what we witnessed in the 1990 and early 2000. They are using some of the dry powder to fund their existing portfolio companies and not capitalize new ones and in order to maintain a high IRR, they need to see far more exits via public markets. The VC phenomenon is relatively new in India. Time will be the judge on how it plays out.
What kind of opportunities are VCs looking at in India?
An investor is looking for diversification, risk mitigation, growth potential and, above all, exits. In general, VCs are decreasing their overall investing dollars, focusing on their best companies and increasing their allocation to later-stage investments. In the current environment, VCs are opting for few, capital-efficient deals in which they have enough dry powder to fund a company, hopefully to cash flow independence. Hence the model calls for investing in later-stage companies that shortens the gestation period.
How should Indian funds attract US investors?
US investors are generally more comfortable with funds that have a track record. Indian money managers are still new in the fund business, most of them managing their first fund. It is estimated that there are over 137 domestic PE funds in India. Most are first generation, therefore there is a fine balancing act that needs to be played. I believe second funds will be bigger. The sector-specific funds are well perceived rather than a general fund. Fund size is important and GP participation plays a key role. As we have already established that India is a favored destination, the India story has to be told well and explained better.
What do you think India should do to build a more sustainable model for funding?
To see infrastructure investments into India, I strongly believe that the Indian government should encourage debt investors. Since most infrastructure projects have long investment cycles, a mix of debt and equity will bring in more investments. Let’s not forget that India estimates almost $1 trillion for infrastructure investments to maintain its GDP growth trajectory during the next plan period. That surely is not coming only from the domestic market. If we need to mobilise $1 trillion, I don’t see it happen with only equity. Debt market is naturally an attractive portfolio from the investors’ standpoint. India opening up its debt market will be beneficial in building a sustaining model.
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