Guided by strong macro-economic indices--such as 8% magic GDP growth and savings rate of 35%--private equity industry honchos seem to be convinced that India offers an attractive investment opportunity like no other.
While the industry continues to cope with challenges of overcrowding and high valuations, the India investment theme is still riding strong. Essentially a mid-market play (and not so much leverage or very early stage), India’s investment appetite and also fund-raising will be guided by this principle, it appears.
PE industry representatives, at their candid best at the VCCircle India Invest 2010, which kicked off with the panel ‘Destination India: Macro Vs Micro,’ were unanimous in their view that “it’s not about making money in India but about how much more can one make compared to a competitor, and justify the carry.” VCCircle put together a galaxy of over two dozen distinguished speakers who touched upon the pulse of the PE industry during the day-long conference, which attracted a house of 150 participants.
The real challenge before the industry, in the current challenging environment, therefore is to carve a niche and evolve different strategies. As Amit Chandra, MD, Bain Capital says, “It’s tough not to make money in India. The question is how much extra you can make to justify the carry”.
However, these think tanks also felt that they have not done a “good job” of pitching private equity as a separate asset class together, which accounts for over 35-40% of FDI which the country heavily relies on. Besides, it is a source of patient capital but often perceived as nothing more than an alternative source of capital.
Chandra added that the regulators need to realise that the PE industry needs a better ecosystem with a separate set of policies conducive to a robust growth. These could come in the form of interventions such as hike in threshold or the trigger offer for PIPE investments, removal of sectoral caps and illiquidity discounts for private equity.
On the sectors which will drive the growth, Shankar Narayanan, MD, Carlyle Group India, and heading the growth equity investments for the PE firm, said, “Infrastructure and consumer remain the key drivers but the success of private equity boils down to backing of an entrepreneur.”
Rajesh Khanna, former head of Warburg Pincus India, said, typically one can identify sectors, do research, identify the risk and returns and follow a “reactive approach style of investing.” But, a “proactive approach” of identifying the growth areas, which are not so obvious and not chased, offer better returns.
The other big challenge is valuations. “The ask-bid ratio is very high. A little bit of prayer helps during this time,” says a candid Luis Miranda, MD & CEO, IDFC PE. With competition from public markets continuing to increase and affecting the valuations in the markets, industry players felt that investing in a public company was more attractive than a privately held company from a valuation perspective.
Taking the point of PIPEs (private investment in public enterprises) further, the first panel speakers said, a lot of companies in India are prematurely listed with about 7,500 companies being listed and most of them having market cap of less than a $100 million. PIPE investments, to the extent of getting rights into the companies and capital getting into the companies, work well with the LPs too. “PIPE’s will grow in a big way, if also a few of the regulatory changes are made,” said Chandra of Bain Capital.
Here is a gist of the day-long panel discussions. Edited excerpts:-
Panel I - Destination India: Macro Vs Micro
Sumir Chadha, MD, Sequoia Capital India (Chair)
Luis Miranda - President, IDFC Private Equity
Shankar Narayanan - Managing Director, Carlyle Group
Amit Chandra - MD, Bain Capital India
Sectors becoming nicher: With the economy growing at such a rapid pace, there is not much left to be done in sectors compared to the time when the risk capital industry just started out. "Perhaps ten years back, there was so much that could be done in the banking space, but now within a sector also, one has to identify niche areas for growth,” said Rajesh Khanna, the former India head of Warburg Pincus. Amit Chandra, MD, Bain Capital India, adds: "India is not a multiple expansion story. We focus more on the negative list than a positive list". Besides, most PE firms have small practices with usually four-five partners. Hence, it also operationally makes sense to identify three or four focus areas. The panel was unanimous in the thought that domestic themes held more appeal rather than outsourcing plays.
Panel II: Private Equity’s Growth Pangs
Deepak Shahdadpuri - MD, BCP Advisors (Chair)
Archana Hingorani - CEO & Executive Director, IL&FS Investment Managers Ltd.
Sebastiaan Van den Berg - Principal, Harbourvest Partners
Praneet Singh - Managing Director, Siguler Guff
Ved Prakash Arya - MD, Milestone Capital Advisors
T S Kandhari - Executive Director, PricewaterhouseCoopers
Is the worst over for PE industry?: The panel remained divided on that one. Archana Hingorani, MD, IL&FS Investment Managers, said, "The worst is not over yet". She added that while this cycle is different from others in the past, and the portfolio companies look in a better position now, the worst is not over yet. However, Praneet Singh, looking after Siguler Guff's investments in India said, the "worst is over for the industry " and that the PE firms who have performed well in the past have only emerged stronger from the downturn. Singh said, they will continue their strategy on investing into top ten PE firms in the country.
Same Networks, Same I-banks, Same sectors: Praneet Singh of Siguler Guff said, the industry has become so overcrowed now that a "me-too" firm will find it challenging in the current environment. He added that the industry which is pre-occupied with the same set of networks, same set of I-bankers, and almost all the firms chasing the same sectors and even deal pipeline, the need for striving a differentiation becomes all the more important. This raised the key question of how to source proprietary deal flow. Agreed Sebastaian Van Der Bert of Harboour Vest Venture Partners, that in the Indian PE industry where more often than not, the deals are auctioned, it is imperative for fund managers to strive for uniqueness.
Is "Value-add" a misnomer?: In one of the very interesting points about the problems being faced by the industry, Deepak Shahdadpuri, MD, BCP Advisors, said, what is indeed the importance of being a "value added" investor and how much it contributes to the entire scheme of things. Quoting a recent Bain Capital report, he said, the "value add" portion in any investment just contributes to less than about 10% in the investment art. It ultimately boils down to the sector that one is betting on and picking up a private held company at the right price. Adding to this, Ved Prakash Arya of Milestone Private Equity said, "A focused approach to investment is the key".
Panel III: VC funding in India: The myth & reality
T C Meenakshisundaram - Founder & MD, IDG Ventures (Chair)
Sandeep Singhal - MD, Nexus India Capital
Bala Deshpande - Senior MD, New Enterprise Associates India
Pravin Gandhi - Managing Partner, Seed Fund
Olivia Ouyang - Investment Officer, International Finance Corporation
Current Entrepreneurs more efficient than those in 90s: TC Meenakshisundaram, founder & MD, IDG Ventures, said, the VC funding scenario in India is far ahead than what was prevailing in the 90s. There were a few international and domestic VC funds who tried their luck in the technology boom in the 1990s. But, they faced the setback after the internet boom collapsed and burnt their fingers. Investors, new or second-time funds, were back in 2005, he said.
Pravin Gandhi, managing partner, Seed Fund, said, though there is no doubt in India’s growth story as far as the investments are concerned, finding the right entrepreneurs remains a tough task. According to him, more funds have to come to the fore to support and mentor new entrepreneurs in India.
According to Sandeep Singhal, MD, Nexus Capital, the Indian entrepreneurs are thinking about global expansion of their businesses. They are keen on entering the global markets, which cause more VC funding into them. For example, the domestic manufacturing firms are looking for global customers more nowadays.
Bala Deshpande, senior MD, New Enterprise Associates India, which invests across India and China, is of the opinion that the old scenario where young companies without entrepreneurship background has been changed very much. For VC funding, there are wide sectors available presently than mere technology companies. At the same time, investors need to be more flexible as far as the investments are concerned. According to her, exit is easier in India as compared to other Asian markets like China, Korea and Japan. Sandeep Singhal opines that investors are more like partners, but at the same time, the promoters themselves will be ready to solve the issues by themselves. For him, valuations are not the right mark always for exit. The ability of the company or products to get absorbed by the market is the criterion for an exit, he said. According to Bala Deshpande, buyback has been one of the most convenient ways of exit.
Panel IV: The rise of domestic LPs
Gopal Srinivasan, chairman, TVS Capital Funds (chair)
Vishakha Mulye, MD& CEO, ICICI Venture,
Sachin Khandelwal, senior general manager, ICICI Bank
Pankaj Sehgal, Managing Director at SUN Group
Ved Prakash Arya, MD, Milestone Capital Advisors
New class of investors: According to Vishakha Mulye, MD& CEO, ICICI Venture, as India grows fast, there would be a requirement for much more capital in the next 5-10 years. The presence of domestic LPs is needed to fill the critical gap in capital raising. The assumption that PE investments were risky in the Indian context has now changed very much. Ved Prakash Arya, MD, Milestone Capital Advisors, is of the view that raising money is not a concern as the fund-raising scenario has changed with the entry of more domestic LPs in India. Earlier, except stock market, there were not many options for fund-raising, he said. However, lack of guidelines for VC funding is a concern now, he added. Sachin Khandelwal, senior general manager, ICICI Bank, said the quality fund managers are the essential part of the domestic LPs success story. Pankaj Sehgal, Managing Director at SUN Group, is of the view that the lack of liquidity in overseas market and increased liquidity in Indian market was the driving force for the rise of domestic LPs. Domestic LPs are attracted and seek exposure in the India growth story.
Panel V – The LP-GP Relationship: A tough balancing act
Anand Sunderji - Formerly principal with a leading fund of funds (Chair)
Renuka Ramnath - Founder & MD, Multiples Alternate Asset Management
Pratima Divgi - Investment Associate, Squadron Capital
Manik Arora - Founder & MD, IDG Ventures India
Hetal Gandhi - MD, Tano Capital Advisors
Olivia Ouyang - Investment Officer, International Finance Corporation
Bryan Stewart - Director, Liberty Global Partners
A detailed pitch is the best pitch to the LPs: Renuka Ramnath, the MD & CEO of Multiples Equity, a PE firm, fresh from a fund-raising experience, said, the articulation of the pitch to the LPs should be well-detailed capturing points about the investment strategy, team building, deal sourcing, competitive landscape, distribution of economics etc, and a back up plan. She added that it is the key responsibility of both LPs and GPs to have an open discussion on every detail with the GP ensuring that he/she sticks to the strategy detailed out during the pitch of the event.
What you want from your portfolio companies is what we want from the GPs: In an industry where private equity has become an amalgamation of so many things-- investing in small companies, buyouts, public companies, secondary stocks--LPs increasingly want GPs to be fair, honest and take the governance and diligence as positively as they do with their portfolio companies. As Oilivia Youang of IFC puts it, “The LP-GP relationship has to be strong and positive, so that it can attract follow on commitments too.” She also added that the funds are increasingly becoming sector niche. Those funds which are able to spot new areas of growth Vs the obvious areas of growth will succeed.
The Growing Need for An Operating Partner: “In India, to be fair to my LPs and to be a successful GP, there needs to be an operating partner,” says Renuka Ramnath, of Multiple Equity. This could enhance the involvement with portfolio companies and help them achieve scale.