India saw private equity firms and venture capitalists investing close to $8 billion into the market in 2010. Most of the funds were largely invested in the energy sector. In 2009, it was almost half the amount at a little over USD 4 billion. Also, FII flows stood at almost $29 billion in 2010. FIIs however have been net sellers so far in the current year. In an interview with Deepak Shadadpuri, MD, Baer Capital, gave his perspective on flows, private equity investment and the debate on emerging markets versus developed markets.
What have you made of what has been rough start for India and this whole EM versus DM debate that had this year?
I think it is an interesting debate. Emerging markets are probably down about 17% this year, India probably down slightly more than that. But I think it is a healthy correction. At least from an India perspective the underlying foundations for long term growth are very much in place. There are some macro concerns which are at least from a FII perspective are leading to short-term outflows.
This includes persistent and sticky inflation numbers. A couple of the issue with the corporate scams. But I think longer-term India will continue to be a very attractive investment destination. Unlike Alok (Sama) who looks more at the public market side I focus on Baers private equity business. We are actually very optimistic about the future and a short-term correction like this leads the private unlisted market recalibrate prices which are starting to look rather on the expensive side.
Just to understand the flow situation better though what is your sense of where it is stemming from are people pulling out money from this market, is it redemption call issues or is it just a cash call issue right now where people are choosing to up their cash portions waiting to see how India is panning out?
I just came back from a two week trip to meet some of the investors in Europe. I think it is two things from the feed that I heard from our investors. One is many of our investors missed out on the rally in the developing markets last year and have underperformed so are reallocating some of their capital to more developed markets results in the last couple of quarters both from the US, UK and European markets have shown a good quality growth, resilient growth that is one reason why they are putting more money into developing markets.
Secondly they are upping their cash proportion a little bit. But I do not see this as a long-term negative for India. I think it is a healthy rebalancing. India will start showing healthy flows very soon on the FII side.
On the private equity side, there is a lot of capital yet to be deployed unlike FIIs. Private equity capital is very sticky. Significant amount of funds have been raised to be deployed into India. I think you'll continue seeing healthy inflows over the next 3-5 years.
A lot of that money is usually routed towards infrastructure projects, power projects, power providers and on that entire space the secondary market has actually completely de-rated the entire sector – is that warranted you think and where do you see these sectors settling down to even in terms of valuations.
Let me put in a private equity perspective that is what I focus on. The same risk aversion towards capital goods and infrastructure heavy projects has set into the private equity market as well. We are not seeing regulatory clearances. We have issues with obtaining land. Banks have been afraid to lend to heavy infrastructure sectors, power, real estate, partly to do with what is perceived to be high issue valuations and also to do with the news coming out from different pockets of the government. I think in the next 2-3 quarters this will settle down.
The bottomline is that there is huge demand for infrastructure, for power, for roads in India. We just have a lot of demand and not enough supply. I think as the corporate governance issues and as these scams are investigated, as investors see through what is a short-term issue I expect flows to come back. I think valuations will come back too. It is difficult to say what is fair value.
As long as demand exceeds supply I think you will see valuations picking up too. It should be above from where they are today. But I do not think you will see the lofty valuations you have seen just recently.
Would you agree as well as then that perhaps in specific pockets especially like power there was valuation bubble going until recently?
I think they were expensive. The question is with the medium to long-term outlook are you over paying in the short term for what is a valuable asset in 5-6-7 years time. I think there were pockets where it was expensive.
This is primarily not because of what the potential is. I think the issue in power and infrastructure is execution. It is okay paying a multiple of book. A) if the company is out there execute according to plan. What we have seen in the last 2-3 years is that companies for number of reasons one is government clearances, they ability for financial closures and the basic ability to execute have not been able to execute on plan.
So projects which should have taken 2-3-4 years are been taking 6-7-8 years which makes the entry valuations then look very expensive. What will happen is people will start having a more, a better view of how long it takes to execute some of these longer-term projects, what the risk are and price these risk and execution timetables more appropriately.
It is heartening to hear though as you pointed out that there is still a lot of private equity money that wants to come into India – can you even give us a sense of the kind of money there is in the pipeline waiting to enter because some of that money does eventually make its way to the secondary market?
It does. Let me give you some numbers. In 2010, the year we just closed in December, there was about USD 8 billion of private equity that came into India. This excludes real estate. So at about USD 8 billion you are about the same number you were in 2006. The numbers I am expecting over the next 5 years would probably be in the USD 60 to 75 billion range of capital the way it will be deployed into India both from domestic funds, regional funds and global funds.
This is an issue which I imagine troubles private equity players as much as it does institutional investors into the secondary market which is a lack of any public policy impetus through last year – is that frustrating for someone who has been investing into India?
It is frustrating. It is frustrating for us, The fund is also a big concern for our limited partners so most of the capital I advice on the underlying investors are large fund of funds, pension funds, insurance companies in the developed markets. They understand why we have inflation, they understand that demand is more than supply, food is of concern.
What they are unable to comprehend at a level we are used to is why government and parliament can’t make decisions, why we are not able to receive regulatory clearances, why acquisitions of land is so difficult. Government also realize this. The government I believe is working very-very hard to overcome these issues and I think they will in the short and medium term.