"We Might See Action In Smaller Ticket Size Transactions": Srinivasan

Here is the second of the Deal Outlook 2009 interview series. VCCircle's Shrija Agrawal speaks to Gopal Srinivasan, chairman and Managing Director, TVS Shriram Growth Fund , a Rs 600 crore all rupee private equity fund floated by  the TVS Group family and the Shriram Transport Finance group. Launched late last year, the fund recently announced their investment in 9.9 Mediaworks, a Delhi based media consultancy. Excerpts :

Will you see a slowdown in private equity deal making in India in 2009?

India continues to be one of the biggest markets in Asia and certainly an attractive market from a global perspective in the PE world. We might see the value of deals coming down as a function of lower valuations as much as the impact of an economic slowdown. Having said that, PE funds which have already raised cash, are likely to benefit in this market.

How do you see private equity exits in 2009? What is your opinion on IPOs and M&A based exits, and how will they fare in this year?

Dated deals where PE funds have added operating value in the companies are likely to be less impacted as they would have generated IRR from revenue growth as well as margin improvement. However, we might see less opportunistic deals where someone had invested 2 years ago and wants to exit in a hurry. 


Will private equity investors prefer to invest in a listed company or in a privately held company?

PIPE deals are more attractive in environment where valuations are lower and management expectations are aligned with current valuations. Generally, companies will pursue PIPEs when capital markets are difficult to raise debt or equity via more traditional means. 


How do you see the valuations this year? Do you see entrepreneurs adjusting their expectations in tandem with public markets?

The world has changed in the last 12 months and it is a difficult period for everyone and entrepreneurs are no exception. Valuations are beginning to adjust to the new realities, but  there is still enough room to debate whether we have reached the bottom, and whether there will be a V shaped recovery or a U shaped one. 


Which sectors would you look to invest in 2009?

Ideally sectors which offer both recession resistance as well as faster growth. However, in the real world, it is difficult to marry both so we prefer sectors which are structurally underpenetrated and will be multi-year growth stories. We believe a number of sub-sectors which feed on consumer consumption will be very attractive to look at such as education, real estate ancillary, and specialty retail. 


Which sectors would you will not look at investing in 2009?

Most likely premium price consumer sectors as well as some media and advertising sectors may be ones where people tread with some trepidation. Also such as banking and financial services or core manufacturing and real estate. Nothing is cast in stone. A lot depends on quality of business model and individual deals 


Is there a change in the way you evaluate an investment proposal? Will it take longer for you to close a deal than compared to what you did it at a boom time like late 2006 or 2007?

We believe calm, considered and conservative approach is the best way to ride through the choppy waters. We would like to be thorough in our due diligence process. We were set-up in May 2008 and are less sure if we would have changed anything if we were investing in 2006 or 2007 though I can imagine there would have been higher external pressure from promoters and bankers to do deals faster. 


Do you see more funds coming in to the market?

India continues to be a very attractive market in Asia and the world from a PE perspective. There might be temporary slowdown but the attractiveness of PE as an asset class will not be lost on the investors.

Do you foresee distressed asset sale?

We can say that valuations have come down and so have expectations in many cases. Distressed asset sales typically happen after prolonged downturns.  We have not reached that stage yet.

Do you see more buyouts (controlled transactions) in 2009?

May not necessarily be directly by PE Funds but certainly more in terms for platform building M&As by PE funded companies. However, leverage is more expensive today and comes with more covenants than in the past. We might see some action in smaller ticket size transactions with attractive valuations.

Do you see an increase in PE-backed acquisitions?

Attractive valuations are a trigger in relatively fragmented industries. We might see some action in industries where consolidation benefits the industry.

This is the second in the Deal outlook for 09' series on VCCircle.

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