Private equity is hungry for deals once again even as the global economy and markets remain volatile and tentative at best. PE funds are making a strong comeback after investments nosedived well over 60% to fall below $5 billion in 2009. ICICI Securities Managing Director & CEO Madhabi Puri Buch spoke to VCCircle about the bullish private equity and volatile capital markets and how PE might play out well in the prevailing situation. She boarded I-Sec, one of the largest equity houses in the country, in February 2009. She spearheads the company’s initiatives in Corporate Finance which includes Equity Capital Markets, Private Equity and Advisory Services, and Institutional Equities; retail equities which includes ICICIdirect.com, one of the largest players in the internet brokerage space and financial product distribution. Buch has been with the ICICI Group for over 15 years where she has been instrumental in expanding various businesses like home loans, bonds and retail broking. She is a gold medallist in mathematics from Delhi University and an MBA from IIM – Ahmedabad. Edited excerpts from a free-wheeling interview:-
We are seeing the return of private equity and in a big way. Are you bullish about it? How do you see it playing out this time?
I see two or three factors aiding private equity investments in the current scenario. In a large number of firms, the control of management has passed on from the so-called older generation to the younger generation. What has really happened with this shift is that the younger generation is more attuned to value creation through market mechanism rather than doing it merely through profits at closely held companies. They are far more willing to accommodate PE partners, give them place on boards, and agree to some of the covenants. This is a mindset difference and I clearly see it happening.
The other new trend is that the same new generation, aided by the security and confidence created by their parents, are far more proactive in improving transparency and governance standards. They do not want to run it as a small family enterprise. Earlier they used to worry but now there’s a certain comfort factor. It’s this commitment to governance and transparency which fetches them premium valuation and set the context for working with private equity.
The third factor is that capital markets have become far more volatile and unpredictable for smaller firms. So their willingness to say that I am better off talking to one investor and discuss the terms with him, being sure that the money will come, rather than banking on the public markets which may not be supportive. All these trends put together give me the confidence to say that more PE transactions are likely to close this time around. Our estimates suggest that PE transactions in India should be topping $15 billion in FY1, up from $4.8 billion last fiscal.
Several large global funds, especially those focussed on buyouts, have become very active now. There’s also a view that several family promoted mid-sized businesses may be up for sale. What is the sense you get when you talk to some of these promoters?
That’s again an interesting trend that never used to happen here. We are certainly in dialogue with a few promoters who see themselves as serial entrepreneurs. Earlier people used to promote a company in their area of strength and then built on it. But the younger generation is looking at moving on after having developed a business, and exhibiting a desire for serial entrepreneurship – who create an entity and then sell it. What are they going to do then? They want to create something new. Simply based on our anecdotal evidence, we see more buyout possibilities in this space.
I will say that with one caveat though. There are some businesses where the main challenge is setting it up and then managing it becomes a relatively stable affair. They are buyout targets. But when the nature of businesses is such that it requires continuous entrepreneurial work (especially in a strong growth market), then the funds are also realising that they cannot go for a buyout and remove the entrepreneur altogether. Certain sectors are not amenable to complete buyouts at this stage and need the continuation of entrepreneurship to drive the growth. That’s when clauses begin to show up, with funds saying we will buy a large stake but the promoter will have to stay on for a period of time.
We hear about the HNI base taking exposure in private equity as they are no longer averse to risky instruments and look to diversify their investment portfolio. Aditya Birla PE and ICICI are among those who have actively tapped this base for raising their funds. How do you see this developing?
This could grow in metros. I would say in particular that it will grow in the next two or three years because very few funds have repaid. People have to go through their complete cycle of investing and see their money returning to fully appreciate benefits of private equity before investing more into it.
There are concerns about mis-selling it to retail investors who are new to private equity…
I do not see that happening, not really. Most of these are very savvy investors who are advised by two or three wealth managers besides their own chartered accountants, and they have all the information on fingertips. Also, the funds are saying they want a minimum entry price – of Rs 1 crore and above in some cases – when it comes to raising capital from these retail investors so that they understand what they are investing into.
We talked about promoter families willing to cash out and pursue serial entrepreneurship, or setting up family offices with a diversified investment portfolio. From your perspective, what are the opportunities here?
We will see many wealthy families setting up family offices or trusts. But it will be a concentrated market, maybe the top thousand families in India. They will invest a part into private equity or venture capital funds but will plough most of the investible capital into investments managed directly by them or their offices. Many of them would like to have a diversified portfolio in their future interest as well as to nurture serial entrepreneurship.
Talking about I-Sec, we have set up a new team in Mumbai that will focus on the sub-$10 million fund-raising by smaller firms and start-ups. We feel the venture capitalists have become very risk-averse, but see growing interest from the HNI clientele in this space. It is still early days to say anything more on this.
Given the volatile markets, how do you see IPOs turning out. We have had some not-so great debuts in real estate and infra sectors. Is there enough appetite in the market, especially for real estate assets where there is a long list of firms waiting to hit the capital markets?
We must see some of these debuts in the context of the index price. Take the case of a recently launched large-sized IPO. From the time the issue price was fixed at Rs 102, the Sensex came off quite a bit, and the realty index even more. The issue price was down to Rs 96 when co-related to the Sensex and Rs 91 to the realty index, not because of any problems with the company. So, if you ask me, the debut at Rs 96 was fine. You cannot expect the company to buck a worldwide trend in falling markets. It is therefore important to see these in the context of indexing.
Now, talking about IPO pipeline and valuations, I think there is enough appetite in the markets. Given the present situation in the global economy – and again nothing to do with India’s fundamentals which continues to be strong – investors are seeking volatility discount. They seem to be factoring in the volatility that can set in from the time of subscription to the day of listing, as they are locked in with these shares unlike in a secondary market. Since they are also investing in these times, when the markets are volatile, they expect valuation to be sober. If the promoters are willing to accommodate the volatility discount and peg the valuation right, the issue does well. Otherwise there is a bit of difficulty.
So the rather long pipeline of real estate IPOs is not really a concern…
There’s still appetite left for real estate IPOs. That’s because Indian real estate is driven by residential market, by first-time home owners. This is comparatively less risky. So when you sit down with investors, even with private equity, the first question is about the price at which developers are selling units in NCR, Mumbai and Bangalore. Investors have their own benchmarks, and if the pricing is correct they know sales would happen. Bulk of the valuation in this sector is built around mass-market story even though there are some niche opportunities in the super-premium segment.
There’s a buzz about M&As once again. It’s good to have equity cheque in these times when the leverage market has almost dried up. Do you think Indian Inc is back to pursuing serious M&A play and what are the financing options before them?
I certainly see M&A action returning but with a great difference this time. In the last round, India Inc was looking at footprint in developed countries to tap the established markets there. There’s no growth happening in developed markets. Now the focus is on emerging markets, to leverage the Indian expertise – something similar to Bharti-Zain transaction – to tap the growth in such places. The other aspect of outbound acquisition is the search for some technology which can be leveraged to propel further growth in India. So the M&A strategy is completely different from what we saw in the past.
I expect the valuations to be sober and deal sizes to be smaller since the crazy level of leveraging is no longer possible. The companies need to have cash or the ability to raise cash – well-rated corporates know they have the ability to do so and at what price. They need not be sitting on cash as it would be a waste since there is no certainty about acquisitions. Besides, I see share swaps being deployed as a big instrument in M&As. We will be seeing more of this going forward.
We saw significant amount of cash being raised through QIPs last year, and several companies used it for pursuing acquisitions. Do you see it continuing this fiscal as well?
We saw QIP volumes of around Rs 40,000 crore, or just below $10 billion, raised last year. We expect the same level of momentum provided the global markets are stable. We saw a few large issues last year because some large real estate companies wanted to be de-leveraged and were offering good valuations. This year, we may see similar level of volumes but it will be spread across larger numbers of companies.