Investors puzzled by lack of scalable opportunities
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Despite the size of the Indian economy, it is a matter of concern that it is not throwing up enough scalable opportunities that can be accessed by deep-pocketed investors, panellists at the first Mint India Private Equity Conclave held in Mumbai said. At a discussion on ‘View from the Top: The Good, Bad and Ugly’, top executives of some of the largest institutional investors discussed the investment scenario, trends, investors’ sentiments, challenges and opportunities. “It is a source of some concern for us that economy of this size, it is not providing enough scalable opportunities. We do think that there should be more of those,” said Vikram Desai, principal and international director, CPPIB India.
“The question for us is scale. If we are able to find large scalable opportunities to absorb that capital on a direct basis or through a partner, we would do that. In the private equity space, given that this market is significantly fragmented and there are not large opportunities of scale, the correct model for us is to work through our GPs (general partners) to create coverage,” he added.
CPPIB opened its India office in 2015 and has committed about $3.7 billion to the country so far.
“Our internal risk models are throwing off a 2-4% allocations for India safely and we have we headroom to go up in $9-10 billion of potential investment in India from $3 billion today,” Desai said, adding that originating and finding opportunities of scale in India continues to remain the high priority for CPPIB.
In the last couple of years, top Canadian funds have made investments worth more than $5 billion in India, according to public data.
“When we start looking at direct investing, we look at scale, because we have to understand that margins will fall in this country. That is the only way you can create scale and impact. So, we look at business which can create scale,” said Srini Nagarajan, managing director and head of South Asia at CDC Group, a development finance institution owned by the UK government.
The group has committed over a billion dollars among 35-odd fund managers apart from investing directly in the country. It is planning to set up its own renewable energy platform focussed on east India and neighbouring countries.
Reforms such as goods and services tax, Bankruptcy Code and the focus on business at a state level have played a significant role in bolstering investor sentiments, experts said.
“So, we see the positive sign everywhere. But unfortunately, we have to be careful (if the past can predict the future), Indian PE returns have not been as good as the average of the emerging markets,” added Martin Kimmig, chief risk officer, Asian Infrastructure Investment Bank.
Nishant Parikh, partner at Trilegal, said it is a pretty good environment for deal-making and for building new businesses from ground up.
“There’s a big supply out there for people to tap into. But of course, it is not so easy. These are extremely distressed situations, that’s where two things will help—the global distressed funds which are lining up to invest and second is to build operational capability,” he added.
Manish Kejriwal, managing partner of PE firm Kedaara Capital, said that returns in US are tremendous but when one looks at the emerging markets, the opportunity that India provides as a macro, compared with the markets such as Russia, China, Brazil and even Turkey (which was really a hot spot for private equity in the recent past), is huge and there is a ton of money which could be coming towards India.
While talking about the role of due diligence, Reshmi Khurana, managing director of Kroll India, said the macro picture looks pretty good right now but there has been no change in the operational environment, and the day-to-day challenge of getting deals done and running businesses hasn’t gone away.
Furthermore, the governance environment in terms of promoters’ attitude towards private equity capital, accounting and auditing standard, legal and regulatory framework has also not changed drastically, she observed.
However, Khurana highlighted that the willingness to invest large and meaningful amounts based on a partnership model and dig deeper stays intact and that is a positive trend.
Talking about new opportunities, Niten Malhan, managing director and co-head India of PE firm Warburg Pincus, said that in addition to mainstream deals, there are other opportunities like corporate entities actively thinking about businesses that they don’t want to own and there are platforms in businesses behind smart executives who want to be entrepreneurial.
“The pool of opportunity is quite large and the question is obviously navigating that to find specific spots to be partnered with,” said Malhan.
On the other side, Desai stated that there has to be a higher participation of domestic investors into the space which is currently missing. “We need domestic entrepreneurs who take risks. We need domestic capital formation to happen and the foreign investors will come on the back of that. Also, the domestic pension fund system has to allow for investments into alternate assets and more equity exposure, given how young our population is. So, this the area of reform that I think will critically help. As more domestic pools of capital gets formed and there is more domestic capital formation, there are more structural opportunities to invest in,” he added.