Mumbai: With $35 billion in investment capital, DE Shaw and Co., the world’s fourth-largest hedge fund, has set its eye firmly on India.
This September, DE Shaw will open its second office in India, just 14 months after it started off in Gurgaon, outside New Delhi. Having already done $561 million in announced private equity deals, DE Shaw will have invested well over $1 billion in India by June.
Not surprisingly, the firm, which is famous on Wall Street for being very reclusive about its trading methods, is unwilling to give out much detail about its gameplan for India.
However, three clear patterns emerge from the four deals that the fund has disclosed so far.
First, while it is largely sector-agnostic, it will likely broadly focus on companies that exploit India’s cost arbitrage advantage (think auto ancillaries, animation); opportunities that arise from deregulation (think media companies) and public-private partnerships (think infrastructure and real estate businesses).
Second, deals will also be size-agnostic, from as little as $8 million up to $400 million or more.
While none of this is very different from the way most private equity firms that are active in India today would look in terms of their deals, it is a third pattern that sets the hedge fund apart from its private equity peers. DE Shaw appears to be very flexible on how it will make money available to companies.
“We can provide financing using different asset classes with varying tenors, risk profiles and return expectations. We can do very early-stage venture deals also,” says Anil Chawla, CEO, DE Shaw India Advisory Services Pvt. Ltd. “We think our flexible capital approach gives us an edge over the typical PE player.”
So, for instance, if the firm likes a company but does not think that the company is ready for an equity infusion, it will buy convertible bonds instead. The accent on flexibility also allows it to close deals faster, which, the firm believes, will give it superior returns in the longer term.
For India’s booming private equity market, which has already seen over $4 billion deployed in the first six months of 2007, the growing presence of hedge funds, such as DE Shaw, Farallon Capital, Och-Ziff and New Vernon, spells significant changes in the complexion of the market.
The changes, in fact, follow global trends. Hedge funds are increasingly stepping on private equity turf in the US and Europe. As private equity firms, which usually take longer to close deals due to stringent pre-deal due diligence and generally stick to equity-capital led investments, come up against hedge funds in their traditional spaces, it may be a matter of time before the two converge.
Already, there is talk of Washington DC-headquar-tered PE investor Carlyle Group raising a hedge fund. In India, too, according to one senior private equity executive in the Delhi, at least two domestic private equity firms are looking to raise hedge funds.
“Next month, you will see one of them announce a $1 billion hedge fund,” said the executive, who did not want to be named. Likely contenders, industry executives believe, are ICICI Venture Funds Management Co. in Mumbai and ChrysCapital Investment Advisors in Delhi.
DE Shaw’s moves in India underscore the pressures being felt by hedge funds of a similar nature in their home markets. Most of these investors decided to head to emerging markets about two years ago as mature markets reached saturation levels and returns diminished.
DE Shaw set up DE Shaw Investment Management in the second quarter of 2005 to focus on other alternative investments, including private equity. This was also a move by the firm to attract funds from conservative institutional investors, such as pension funds, which tend to be one of the primary investors in private equity funds, but had avoided investing firms such as DE Shaw. Some investors are wary of the enigmatic methods the firm used. For instance, DE Shaw says it uses complex computer-based algorithms to identify inefficiencies in securities and try and profit from those gaps.
The secrecy that surrounds the firm and others of its ilk is something that their investee companies will have to factor in. While a private equity firm will most likely wait five years—some even wait seven to eight years—for a company to reach its full potential and then provide liquidity through an initial public offering, a hedge fund would expect an IPO in about two years.