Private Equity investing in India is showing promising trends. It is evolving, and the space is seeing higher sophistication as well as maturity with each passing year. However, there are certain risks associated with investing in India that are important considerations for all General Partners and Limited Partners who focus on the country. Navigating these risks is critical to value building, and successful investment firms must incorporate risk mitigants as a fundamental part of the investment thesis.
Major concerns in the Indian context include currency depreciation, brief periods of volatile macroeconomic conditions, lack of consistent exits, and regulatory policy changes. During periods of economic stress, the Indian Rupee faces pressures that result in depreciation, which becomes difficult for US Dollar funds to plan for. Market demand and access to capital also get impacted when macroeconomic conditions become unsupportive, making business forecasting difficult. LPs often say that exits are too few and far between in India. The relative lack of depth in the capital markets and M&As means that exit opportunities tend to reduce as check size increases. As fund sizes have increased, many firms have struggled with finding exit opportunities for their assets.
GPs also need to be mindful of the impact of India’s vibrant press and active regulatory agencies on deal making. The information ecosystem in India is relatively “leaky,” and the regulatory environment is rapidly evolving. GPs should be aware of the sectors where regulatory changes are likely to affect their investments, as well as the potential impact of sensitive M&A related information, often incomplete or inaccurate, on live deals.
By keeping in mind these risks throughout the investment cycle - from sector and company selection, to the diligence process, to portfolio management and value creation, and to exit - India offers a few unique ways to overcome many of these risks and protect a value building strategy. FidelisWorld has used these methods effectively across its portfolio.
For example, investment theses for private equity firms in India are usually built around businesses focused solely on the domestic market or with a primary focus on exporting. However, helping Indian companies expand business presence internationally, to the extent of 20-30% of revenues or more, can address many of the risks mentioned above to a significant extent.
Companies with some foreign currency revenues are more indifferent to movements in the Indian Rupee. During volatile times, these revenues provide gains and cushion the impact of depreciation on the company P&L. Further, when macroeconomic conditions in general become volatile, international business provides additional opportunities for growth.
An international revenue profile also adds additional exit possibilities for the investment. A wider universe of strategic and financial buyers, with a global outlook, are willing to evaluate target companies that have a diversified geographic footprint. This often comes at higher multiples as well.
There is also the added benefit of being able to access global financial institutions, where the prevailing cost of capital is much lower than in the Indian market.
Indian businesses are especially suited towards this strategy of geographical diversification for a variety of reasons, allowing them to retain benefits of their Indian presence while also de-risking with some international expansion.
The Indian market is large and conducive to scaling up. This inherent strength allows Indian companies natural expansion opportunities into many markets, particularly those that are geographically close to India. The economies of the Middle East, particularly the GCC, are one such example. The GCC’s large Indian diaspora, US Dollar denominated revenues, physical proximity, higher margins, and benign taxation environment provide Indian companies a welcoming platform to access growth opportunities and alleviate risk.
The economies of the GCC and that of India also provide a natural hedge against each other as India’s economy witnesses significant benefits from lower oil prices while that of the GCC benefits significantly from higher oil prices.
Most of the benefits mentioned above are equally relevant in the case of other regions such as ASEAN, South Africa, and Australia as well.
A large part of FidelisWorld’s portfolio management exercise consists of business development support for management teams. Having built relevant resources and networks required to facilitate international expansion – distributors, retailers, strategic partners, providers of capital, and others – FidelisWorld actively assists its portfolio companies in overseas expansion, recruitment, raising capital, and acquisitions.
Being mindful of these major risks and mitigation strategies during the investment process results in a more targeted sector selection, company identification, and due diligence approach.
Sector specialization allows the investor to select those sectors with relatively less regulatory risk, while increasing the proportion of proprietary deals where entry valuations are more moderate. Deep sectoral knowledge provides the investor an ability to better assess the exit prospects before investing.
Ability to expand internationally becomes a critical filter in the investment identification process and becomes an important discussion with the entrepreneur and management during diligence.
To round off the strategy, looking at growth equity transactions instead of buyout deals increases the exit universe. Partnering with excellent entrepreneurs and management teams protects value in the business. investing in profitable companies reduces the uncertainty of achieving desired outcomes. Finally, using trusted advisor relationships helps preserve the information sanctity of an M&A process.
FidelisWorld has had significant success in deploying the above strategy in its approach to private equity investing. The funds advised by FidelisWorld carefully choose investments that are appropriate for the investment strategy described above. This unique approach has created significant value for FidelisWorld’s portfolio companies as well as its investors.
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