We are in very interesting phase of time. One side, there are PE funds who are sitting on large amounts of funds, not knowing where to invest. On the other side, there are large number of companies (especially in listed space) starving for funds as almost all the fund-raising channels were shut out. Literally speaking, there is no activity in IPO, FPO, QIP, ADR and GDR markets for the companies to raise funds. To summarise, there is large supply of money desperate for investing. And, there is large demand for money desperate for being invested. But still, deal making is still slow with no bridge being built between the supply and demand.
Consistently, Limited Partners (LPs) are complaining that Indian General Partners (GPs) are not generating healthy returns. And, the GPs are attributing the reasons like lukewarm investment returns to a hypothesis that India is slowing and there are no exciting investment opportunities in India. Is that entirely true? Were there really no money-making opportunities in India in the past 3-4 years? Let’s analyse this.
Case study of 2009
For instance, on March 1, 2009, the total market capitalisation of Indian capital markets was about $581 billion. Within 10 months, by December 31, 2009, the market capitalisation went up to S$ 1,304 billion. So, that's an accretion in market capitalisation to the tune of about $723 billion. Of this, 58 per cent stake is owned by promoters. Hence, of this accretion, about $420 billion belongs to the promoter group. The remaining $305 billion wealth accretion belongs to investor community. That’s true. Just feel it: wealth accretion to the tune of $ 305 billion in 10 months. Such moments of 2009 can be called as "magical moments" or "multi-billion dollar moments". They may not be regular events. But, they do come. Those are the moments to act.
This wealth creation has happened right at the time when most of the funds were very much present in the game and have been "looking for" wealth creation. Some of the funds have taken advantage of those “irrational panic” moments of 2009. However, most of the funds couldn’t benefit from those moments. When there was wealth accretion of $305 billion in a matter of 10 months, one expects that the “lion’s share” must have been earned by the savvy sophisticated investors such as private equity (PE) funds. Despite being PE funds, several of them have the mandate for pursuing the public equity investing for certain percentage of the total funds. So, this wealth creation of 2009 was very much in the reach of these funds. This is a classic case of "error of omission".
Error of Omission
There are two kinds of errors. One is "error of commission", wherein something shouldn't be done but has been done. The impact of this will be tangible and visible. Second is "error of omission", wherein something should have been done, but have not been done. The impact of this will be invisible. But, that doesn't mean that was not an error. So, private equity funds not participating in the 2009 magical moments is a classic case of "error of omission". One can always make an argument that listed space is not PE fund domain and they are not in the business of timing the market, etc. But, the fact still remains that it was an "error of omission".
Learning of 2009
Keeping this fact into account, I strongly believe that public market-focused funds must prepare this time for those magical moments. Similarly, the private equity funds shall also not miss those magical moments to the tune of their share of public market focus. If the economy is not doing well and is not expected to do well in the coming few quarters/years, it becomes all the more imperative that the players in the fund managing business have to focus more on the market “mispricing” opportunities. The capital markets tend to move from “irrational panic” to “irrational exuberance” many a times, in the process producing significant “lumpy returns". It is another matter, how much of this one would they be able to capture. If one is not fully prepared for those magical moments, then get ready for one more "error of omission". Every time, India’s slowdown may not be the sole reason for underperformance. One can convert India’s slowdown as an opportunity.
Capturing the magical moments
The idea of the article is not to say that traditional private equity can’t produce healthy returns, but it is to highlight the fact that active persuasion of “public equity” investments can be truly rewarding. This needs special focus and razor-sharp analysis by a well qualified team with experience and exposure in the capital markets. Having the right mindset and right team who has made their hands dirty with intensified capital market exposure can enable to capture those “magical moments”.
(Jagannadham Thunuguntla is Head of Research at SMC Global Securities)
