The mandate of a private equity investor is to produce higher risk-adjusted returns and this is where PE firms should be judged harshly. And investing in a high growth economy like India should ideally make job simpler for investors. However, a host of structural issues are marring the potential to translate the high GDP growth into high returns. These concerns are worrisome as India’s attractiveness has plummeted in the minds of international investors. An industry veteran and senior partner at Baring Private Equity International, Rahul Bhasin throws light on such on-the-ground issues which PE firms are grappling with. Baring Private Equity Partners currently has about $10 billion of assets under management globally, with more than $1 billion invested in the country. Excerpts:
How are LPs viewing India now? What have you picked up from your interactions with them?
LPs have one concern which is returns. Second is also returns and the third returns again. That’s what they are really interested in.
In my view, they are disappointed because they had seen a lot of exciting prospects for the Indian PE but those had not fructified into returns they had expected.
There is an entire gamut of structural reasons behind it: unpredictable currency movements, delay in implementation of projects, inflexible government policies and other issues. But the bottom line is the industry has not delivered the returns which it should have in order to keep attracting the global capital.
What, according to you, are the reasons behind the disappointing returns and where do we go from here?
A lot of them are structural in nature – regulatory issues, enforceability of contracts, delay in project implementation and so on. Plus, a lot of them have got to do with the immaturity of the PE industry itself. For instance, our own issues in terms of productivity, judgement and efficiency. All these factors have added up and ultimately, it’s not a great outcome.
But with time, we will get better at what we do as an industry. Also, there will be some firms who will stand out from the rest. And finally, some amount of natural ‘Darwinian’ selection will take place.
I firmly believe that the economic management of this country needs to get better. The good thing is that a GDP growth of 6-7 per cent is pretty much going to be there regardless of what happens. And in the world today, that’s a pretty good number.
So while the macro is promising, that huge GDP number is not translating into good returns due to micro challenges. Where does the problem lie?
A lot of dubiousness creeps in because the government is on cash system of accounting as against accrual. I think if it gets into the accrual system of accounting, a lot of this gameplaying will correct itself. All the items on the Concurrent List are severe stumbling blocks.
For instance, the government should be responsible for getting all the permissions/clearances required for projects rather than the industry people running around to get permissions. There are significant on-the-ground challenges for getting clearances. A power minister will not talk to the water minister and so on. We need someone to take a holistic view of things.
There is a mindset that “the world needs us more than we need the world” which needs to significantly change. Unnecessary administrative interventions and retroactive tax rate proposals (as in the Budget 2012) are absurd and will mar India's attractiveness towards investors. A recent survey by EMPEA has already downgraded India’s attractiveness to LPs at the 6th position from 2nd.
RBI has recently tightened the NBFC norms or LTV (loan-to-value) for lending against gold, which will affect the growth rate of your portfolio companies like Muthoot Finance and Manappuram Finance. How do you see this?
The argument of the banking regulator is that it perceives higher risk for lending against gold. But all these companies have state-of-the-art risk control infrastructure in place. These are institutions which have been built over a period of time. So putting such checks is like second-guessing the ability of these institutions to assess risks. The cost of borrowing for the non-banking finance companies are expected to go up. This, in turn, would force the companies to pass on the higher rates to their customers. The regulator has earlier said that it will not prescribe rates, but this is just another way of doing just that.
Such moves only appear to be counter-intuitive to the regulator’s own stated policy on social good and responsibility. Indians have as much assets in gold as they have in banks. Such policies are, in a way, limiting the ability of gold loan companies to monetise these gold savings. If one were to monetize the entire gold stock in the country, it would be a huge number. The social need in this sector is very strong.
This kind of intervention is absolutely unnecessary.
While we can allow clean exposures for credit cards and much higher LTV for banks, we are putting checks on gold loans – which are loans only given for less than 100 days. Why do we have different standards prescribed for banks and gold loan companies? If we perceive risk, how can we allow banks an LTV of 140 per cent and limit the LTV of gold loan companies?
The issue is that our regulators exercise an administrative fiat without inviting consultation or discussion from the industry which is just representative of the license raj.
As someone managing international capital, how do these regulations affect your investment decisions?
It is very frustrating. But then what can one do, we have a body called the bureaucracy. I can only make a noise.
Against such a backdrop and the fact that so many PE funds are sitting on uninvested capital, is there room for more capital to come in?
We have got to understand that we are managing investment dollars as fudiciaries and we have got to generate returns. If you look at the opportunity set and what it might take to transform this country from a third world to a first world, then whatever capital comes in, it is going to fall short. But such an opportunity lies ahead of us. What we need is the vision and the managerial know-how to get it implemented.
What sectors look good to you in this market?
It certainly depends on your approach towards investing. Financial services are underpenetrated – so that would be attractive. If you want to lay a certain bit of predictability in your portfolio, consumer and healthcare would be attractive as well. Also, built-out real estate is a safe game now. I think you have to take a balanced approach and a long view on these things.
Talking about private equity, fundraising seems to be very challenging, particularly for first-time fund managers. According to you, how should they approach it?
They should focus on their value proposition and must be really good at that. It would be a mistake for first-time fund managers to be all things to all people. I think they should specialise, they should know what they are doing and do that really well. That will ensure the best chance of success.