Mumbai: CDC Group Plc, the largest private equity (PE) fund investor in India, will resume investing directly in the country after a gap of eight years and is rebuilding its India team for this, chief executive Diana Noble said.
The firm, which has invested at least $1 billion (around Rs.5,530 crore today) in Indian companies, plans to invest another $1 billion over the next four-five years in local businesses, of which nearly half could be through direct equity and debt capital infusion.
London-based CDC in the 1990s invested directly in ICICI Bank Ltd, Satyam Infoway Ltd and Glenmark Pharmaceuticals Ltd, among other companies, but stopped the practice eight years ago after, as part of its reorganization, it sold a majority stake in Actis Capital Llp, an emerging markets PE fund manager, to the firm’s management team in July 2004.
CDC remained an active sponsor of Actis’s investment activities, but ceased direct investments, becoming purely a fund of funds investment firm.
CDC’s decision to invest directly in India means more capital for local entrepreneurs from a fund with a longer-than-typical investment horizon of up to 10 years, but this will also increase competition in an already crowded market. There are 400 PE and venture capital firms in India, according to industry estimates, but not more than 20% of them are active.
Noble, in an interview, said CDC will resume providing equity and debt capital directly to businesses, financial institutions and infrastructure projects, besides backing investment funds.
“Although CDC has been focused on funds in the recent past, we recognize that the Indian business community requires different capital instruments like debt and quasi-debt as well as equity and long-term tenures beyond the life allowed by PE fund structures, as well as the ability to take higher risks than typical PE firms,” she said.
“To implement our strategy, we are rebuilding the team to get reconnected with the Indian market. Actis’s Srinivasan Nagarajan is joining us mid-next year as regional director, based in Bangalore, and Donald Peck, who used to run CDC’s South Asia office, is advising us as chairman of our South Asia investment committee,” Noble added.
Nagarajan was overseeing financial services at Actis as its director. Mint could not get in touch with him as an email sent to his Actis address bounced.
“We confirm Srini is leaving Actis as personal reasons require him to relocate to Bangalore. Srini will join CDC after completing his gardening leave,” said J.M. Trivedi, head of South Asia at Actis.
A gardening leave is where an employee who has resigned is asked to stay away from work during the notice period, while still remaining on the payroll.
The strategy shift is expected to help CDC support investment building of businesses throughout Africa and South Asia, and support job creation in developing countries, said Noble, adding it will also allow the firm to move its capital where required.
CDC will focus on building a small number of larger businesses to scale over a 10-year time horizon, she said. The firm will invest across sectors. “Broadbased growth and wealth creation through job creation is our aim,” said Noble, adding that microfinance institutions continue to be attractive for the firm.
CDC will continue to back smaller enterprises and early stage deals through the funds that it supports.
“For direct investments, we want to support growth, but start from a reasonably large base as our minimum investment size is $10 million,” said Noble, adding that investments in listed firms are not on agenda unless they could have significant influence on the firm.
CDC has invested in PE funds such as Multiples Alternate Asset Management—promoted by Renuka Ramnath—Ascent Capital, Actis and Ventureast Proactive Fund. It is an anchor investor in Pragati Venture and Incubator Fund, the first fund to focus on the country’s eight poor states: Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Rajasthan, Orissa and West Bengal.
Noble said CDC will do deals that are more complementary than competitive with its general partners. “We will co-invest with them where they need us and beyond this we will look at investments that might require longer tenures, a greater appetite for risk or are in harder places than we typically see PE investing,” she said.
The decision by CDC to invest directly comes at a time when the Indian PE industry has been severely criticized for not offering the desired returns and exits to investors. Capital supply has run ahead of the ability of the market to generate returns, resulting in high competition for deals and pricing that overestimated future growth.
“CDC has been investing in India since 1987 and we have seen many cycles and understand it is essential to remain committed to markets for the long term,” said Noble, adding, “There is plenty to be gloomy about in respect of returns generated more recently, but India will continue to grow at 5-8% and will always need long-term, committed, patient capital.”
Experts say the decision of a fund of funds investor to make direct equity investments in firms may not necessarily be a reflection of its experience with investing in funds.
“The decision to make direct equity investments may be due to a shift in its risk-return criteria for a certain geography or due to some other broader developmental commitment towards a certain geography,” said Vinod Wadhwani, director at Ambit Corporate Finance, adding that direct equity investments will entail significantly greater bandwidth in terms of time, resources and local presence.
Wadhwani said though the Indian macroeconomic environment continues to face some headwinds, the longer-term growth prospects continue to be strong.
“How many countries in the world today can offer that kind of growth opportunity?” he asked, while cautioning that the PE market in India is overcrowded with too many funds competing for the same deals.