New Delhi: The declining equity markets have spurred fresh demand for private equity funds here, and may mark the start of a new era for private equity as an industry, according to India’s top private equity investors who spoke at a panel discussion, “2008: A Turning Point for Private Equity in India”, organized by Mint as part of its “Clarity Through Debate” series.
Private equity has been around in India for some 15 years, but now, with the bearish turn of the equity markets as the catalyst, the next five years could see the traditional role of such growth capital augmented.
Akhil Gupta, Blackstone Advisors India with Renuka Ramnath, ICICI Venture Funds Management (Photo: Sanjay Sharma/ MINT)
“There is an order of magnitude change in terms of the influence private equity will have,” said panellist Renuka Ramnath, managing director and chief executive of ICICI Venture Funds Management Co. Ltd, who expects $500 billion (around Rs20 trillion) coming into India via private equity between now and 2020. She added that $20 billion worth of deals have been announced and fund-raising in the capital markets has been $25 billion. “Money coming in through the private route is as much as the public route, which was almost non-existent five years in history,” she said.
The panel agreed that several roads will come together in 2008. The psyche of promoters has become increasingly global, with arguably increased momentum after acquisitions such as the Tata Steel Ltd-Corus Group Plc. deal in the first half of 2007. This mindset change had helped fuel demand for private equity as a legitimate fund-raising route in the eyes of promoters, who have had a penchant towards debt over equity in the past but have now recognized the advantage of private equity networks and expertise in other geographic markets (if not just their brand value).
PE investors expect the Indian economy will continue growing despite the slowdown in the US and that Indian companies will need funds for expansion. Many such investors expect equity markets to continue to drop, which will bring more promoters to their doorsteps. And some have already seen part of that expectation come to fruition.
Long-term thinking: A view of the audience at the panel discussion (Photo: Sanjay Sharma/ MINT)
“Since the markets have corrected, the deal flow that we have seen in the last two weeks, well, in the last month would probably equal in terms of value to the deals that we saw in the previous two years,” said Akhil Gupta, senior managing director and chairman of Blackstone Advisors India Pvt. Ltd.
Gupta sat alongside ICICI Venture’s Ramnath; Manish Kejriwal, senior managing director and country head, Temasek Holdings Advisors India Pvt. Ltd; Sanjeev Aggarwal, managing director at Helion Venture Partners; and Ajay Relan, managing director of Citigroup Venture Capital International India (CVCI) in a panel discussion led by Raju Narisetti,Mint’s managing editor.
Relan, along with Ramnath and Kejriwal, said that private equity would now get back to long-term thinking because the equity market drop would put more “discipline in the market”.
“We will get back to doing what we do best, and make investments over a three-seven- year horizon and be truly patient investors,” Relan said.
And there were other parties also confusing the role of private equity. Hedge funds, in particular, were in the market doing quasi-private equity deals.
Many funds making these types of investments were expecting to make quick returns after one year to 18 months (a long-term investment for a hedge fund). Kejriwal pointed out that this “variety has withdrawn”.
While the panellists talked about this shift towards discipline positively although it is also a sign of caution, they didn’t discuss whether their own investors or limited partners would also become more cautious.
Helion closed a second fund of $210 million mid-March although, as Aggarwal noted, they “haven’t made money yet.” Some private equity investors have said that this may not be as easy as 2008 progresses.
On the sidelines of the conference, a fund manager who was closing a fund that will be approximately $200 million, and did not wish to be named, said that he was relieved to finish fund-raising as he did not expect it to be as easy for others to raise funds in 2008.
The panel did raise more questions about increased risk in the market than at any other conference in the last year, although with few immediate answers. “The word ‘risk’ was forgotten, it was deleted from the dictionary in the last year and fortunately that word has reappeared again,” Blackstone’s Gupta said.
“A lot of our companies are in a very high growth phase, and when markets correct more savagely particularly… where we operate in: the mid-cap space,” Relan said. “Some of their growth plans depend on raising equity and now they will have to rely on debt. We might find the Indian corporate sector getting more risky in the near term because of the reliance on debt.”
Relan and Gupta both said that investment in public companies (known as PIPE deals) will be stymied for the next three months because of the Securities and Exchange Board of India (Sebi) policy that requires a buyer to pay the higher of the 26-week average or two-week average stock price of a company.
Relan said Sebi pricing is 30-40% above current trading multiples in many instances. “This highlights the weakness of the Sebi policy,” said Gupta, who noted that promoters cannot raise capital even if they are open to lower valuations.
The market dip will also make exits more difficult for private equity investors, who will mostly look for buyers, whether they are companies or investors, as opposed to the IPO route. And these sales would potentially be at lower valuations.
Ramnath said they are continuously looking for ways to reduce the risks for their overseas limited partners. Her team has tried to come up with ways to protect such investments from rupee appreciation, given that they typically invest in dollars, which are converted into rupees for local investments and spending, and the profits are to be returned in dollars.
There is little private equity funds can do to protect themselves against such risks because their investments are typically long-term and currency cover for such terms is expensive. Ramnath and Relan said that they are, however, working with their portfolio companies on issues such as interest rate and short-term currency risks.
Yet, Relan noted that one of CVCI’s portfolio companies had recently complied their accounts with Sarbanes-Oxley regulations, which has a guide for helping company heads determine how their business is exposed to risk. CVCI, he said, is working on implementing this with other portfolio companies, as he believes management in India needs to pay attention to such risks.
“I think it will spread and in the next three or four-five years, I think risk would play as much of an important role as growth does today, so there will be a balancing of these two elements,” he said.