Mumbai: Private equity (PE) investors are hungry for deals once again despite renewed volatility in world financial markets and global economic uncertainty. PE investments in India declined well over 60% to below $5 billion in 2009 (Rs23,250 crore now) as the US and Europe battled recession. ICICI Securities Ltd managing director and chief executive officer Madhabi Puri Buch talks about how the PE market might play out this year. Edited excerpts:
We are seeing the return of PE in a big way. How do you see it playing out this time?
I see two or three factors aiding PE investments in the current scenario. In a large number of firms, the control of management has passed on from the so-called older generation to the younger generation. What has really happened with this shift is that (the) younger generation is more attuned to value creation through market mechanism rather than doing it merely through profits at closely held companies. They are far more willing to accommodate PE partners, give them a place on boards, and agree to some of the covenants. This is a mindset difference and I clearly see it happening.
Analysing trends: Madhabi Puri Buch says ICICI Securities has set up a new team to focus on the sub-$10 million fund-raising by smaller firms. Abhijit Bhatlekar/Mint
The other new trend is that the same new generation, aided by the security and confidence created by their parents, are far more proactive in improving transparency and governance standards. They don’t want to run it as some kind of a small family enterprise. Earlier they used to worry but now there’s a certain comfort factor. It’s this commitment to governance and transparency?which?fetches them premium valuation and sets the context for working with PE.
The third factor is that capital markets have become far more volatile and unpredictable for smaller firms. So their willingness to say that I am better off talking to one investor and discuss the terms with him, being sure that the money will come, rather than banking on the public markets which may not be supportive. All these trends put together give me the confidence to say that more PE transactions are likely to close this time around. Our estimates suggest that PE transactions in India should be topping $15 billion in FY11, up from $4.8 billion last fiscal.
Several large global funds, especially those focused on buyouts, have now become very active. There’s also a view that several family promoted mid-size businesses may be up for sale. What is the sense you get when you talk to some of these promoters?
That’s again an interesting trend that never used to happen here. We are certainly in dialogue with a few promoters who see themselves as serial entrepreneurs. Earlier people used to promote a company in their area of strength and then built on it. But the younger generation is looking at moving on after having developed a business, and exhibiting a desire for serial entrepreneurship—who create an entity and then sell it. What are they going to do then? They want to create something new. Simply based on our anecdotal evidence, we see more buyout possibilities in this space.
I will say that with one caveat, though. There are some businesses where the main challenge is setting it up and then managing it becomes a relatively stable affair. They are buyout targets. But when the nature of businesses is such that it requires continuous entrepreneurial work (especially in a strong growth market), then the funds are also realizing that they cannot go for a buyout and remove the entrepreneur altogether. Certain sectors are not amenable to complete buyouts at this stage and need the continuation of entrepreneurship to drive the growth. That’s when clauses begin to show up, with funds saying we will buy a large stake but the promoter will have to stay on for a period of time.
We talked about promoter families willing to cash out and pursue serial entrepreneurship, or setting up family offices with a diversified investment portfolio. From your perspective, what are the opportunities here?
We will see many wealthy families setting up family offices or trusts. But it will be a concentrated market, maybe the top thousand families in India. They will invest a part into PE or venture capital funds, but will plough most of the investable capital into investments managed directly by them or their offices. Many of them would like to have a diversified portfolio in their future interest as well as to nurture serial entrepreneurship.
Talking about I-Sec (ICICI Securities), we have set up a new team in Mumbai that will focus on the sub-$10 million fund-raising by smaller firms and start-ups. We feel the venture capitalists have become very risk-averse, but see growing interest from the HNI (high networth individual) clientele in this space. It’s still early days to say anything more on this.
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