The government’s decision to allow 51 per cent FDI in multi-brand retail and 100 per cent in single-brand formats in India is considered to be a very positive move by the private equity players, especially those who have made meaningful investments in the sector. For most, this move will help in bringing together long-term equity partners who can fund the companies in the initial years of growth. Often, the lack of deep-pocketed investors in this space has left a few companies bleeding while a few did not come along as the investors imagined they would. But right now, the common view is that the inflow of funds from strategic partners and international retailers will only improve the ‘retailonomics’ in the country.

However, FDI is not likely under the ‘automatic route,’ implying that FIPB approval is required on a case-to-case basis, feel investors. As private equity practitioners keenly watch for policy notification, keeping in mind the likely opposition from coalition partners, the policy is likely to broaden their exit options as it provides opportunities for domestic retailers to unlock value. VCCircle speaks to a few PE investors who have an exposure to the sector to quickly assess the impact of the latest move on the industry:

Long-term Funding Options & Partnerships Come To the Fore

The retail sector is completely starved for equity. There is only a limited amount that can be brought in as equity from private equity funds. But you need a strong equity partner to fund these companies in the initial years to achieve scale. Apart from private equity, the other option is to raise debt, which has often created problems for a lot of retail firms. It opens up exit options, especially for strategic investors. For retail companies who have achieved a certain amount of scale – be it in fast food, QSR space or pharmacy – it will serve as a platter for strategic and international players who wish to enter the growing domestic sector in India.

S. Harikrishnan, General Partner, Avigo Capital. He also sits on the board of Spykar Lifestyles Pvt Ltd.

Exit Options Increase

The new FDI regulations for retail indicate a strong positive trend for the Indian retail sector, as well as for the PE Funds who have invested in Indian retail assets. This will not only act as a trigger for potential PE exits but also for new investments in Indian retail in the future. Given that some of the PE-invested retail assets have not performed very well in financial terms, the new regulations will clearly open up exit options for PE players. And those who have been able to build a strong brand and distribution network would be attractive targets for international players.

Raja Lahiri, Partner, Transaction Advisory Services and Grant Thornton India. He also advises PE firm on deals.

Beneficial To Smaller Retailers

Retail is a very capital-intensive sector and one must have deep pockets to be able to sustain the business. That is why big boys like Reliance, the Birlas, the Tatas, the Goenkas and the Mahindras are in it and they have been able to sustain the losses until they can build scale, processes and expertise. The new laws will actually be beneficial for the smaller retailers who have not had access to the capital that the big boys have. PE funds will be hugely interested as we believe that the retail sector is relatively underdeveloped and has huge, longer-term potential. Of course, the conditions imposed in the policy are not ideal as it is best that companies make those decisions. But if that is the price to pay for opening up the sector, we can live with it.

Jacob Kurian, Partner, New Silk Route Advisors, an Asia-focused growth capital firm with $1.4 billion under management. He also sits on the board of Cafe Coffee Day, India’s largest coffee conglomerate.

No Change For Small & Mid-size PE Firms; Only Large Ones Will Benefit

It is a benefit to the extent that the sector, on the whole, will develop and you will see some serious players entering the country. But if you look at the riders, we, as a PE firm, are at the same level where we were before. The proposal is to permit FDI in retail only if the foreign investor brings in a minimum investment of $100 million. We are not such a big fund to write such large-size cheques and this move is essentially a no-game-changer for small and mid-size private equity firms. 

(Rakesh Sony, Director, Motilal Oswal Private Equity Advisors, a $125 million SME-focused fund.)

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