The PE (private equity) industry in India is quite nascent, and started as a VC (venture capital) industry in 1998 due to the dot com boom and the attractiveness of the IT (information technology) sector riding on the back of the perceived Y2K problem, reminisces Vikram Utamsingh, Head of Markets and Private Equity Advisory, KPMG.
“In 1998 we had some 60 deals of a total value of $250 million which peaked in the year 2000 with 280 deals of a total value of $1.1 billion. The dot com boom then imploded and, as a result, VC investing dropped to 56 deals of a total value of $470 million,” he recounts, during the course of a recent email interaction with Business Line.
The PE industry emerged in 2004 with 82 deals of $1.7 billion and this peaked in 2007 with some 430 deals of a total value of $13.9 billion, continues Utamsingh.
He rues that unfortunately during this entire period PE and VC have not been recognised as a distinct form of capital by the Indian regulators and as a result there are aspects of current regulation which hamper PE investing.
“So, for example, if a PE firm acquired 15 per cent in a public company, then the PE firm would be caught by the open offer rules even though it is not a promoter or in control, or more importantly seeks to get control, and nor is it in the management seat.”
Another regulation that he draws attention to is that a PE investor loses its protective rights after a company goes public. “There is, therefore, an important need for the regulator to frame appropriate regulation for PE investing if this form of investing is to be encouraged in India.”
Excerpts from the quick interview.
On the scene at the end of 2009.
As we look at the end of 2009, unfortunately we see an environment which was not to dissimilar to that at the end of 2007. There is once again abundant liquidity together with a buoyant stock market which means that PE firms are finding it difficult to compete in deals where these alternative forms of capital are also available.
At a point in time back in March 2009, PE firms were heaving a sigh of relief that sanity seemed to be coming back into valuations and alternative sources of capital like an IPO (initial public offer) or FCCBs (foreign currency convertible bonds) were increasingly difficult to access. However this changed to fast to soon which means that the environment that PE firms face today is not that different to the one they were facing back in 2007.
There is a fundamental difference though. PE firms have learnt their lessons of 2007 and the focus has therefore shifted from momentum investing to fundamental investing. This means that although we will see increased deal activity from PE in 2010, these deals will undergo greater scrutiny and the ratio of closed deals to aborted deals will fall.
We will also see an increased focus towards investing in domestic-driven sectors such as education, healthcare, infrastructure, logistics, food and agriculture and consumer-driven industries; IT/BPOs and KPOs will continue to be attractive as well.
At the end of 2009, we also see that the limited partners (LPs), which are the organisations that invest in PE firms, have become much more particular about the PE firms that they want to invest in. Back in 2007, there was a sense of buoyancy on fundraising, and several individuals with no prior PE experience were raising PE India focused funds. LPs are a lot more careful about investing in such first-time funds and hence although we will see the emergence of new funds in 2010 they will be led by individuals who have had a track record as a PE professional.
At the end of 2009, we also see that PE firms have finally come to realise that they need to work closely with their investee companies to fully realise their investment thesis. As a result of the downturn, there would be several investee companies who may not be able to achieve their business plans which was the basis of the PE investment.
PE firms need to provide strategic direction and, in some situations, operations help around improving working capital efficiency and the supply chain to help the investee companies reduce their costs and deliver the desired growth and profit margins.
LPs also clearly have this expectation from the PE funds. In a recent survey conducted by KPMG of PE firms and LPs, LPs indicated that the single-most important priority was for the PE firm to work closely with their investee companies. However, the level of involvement will continue to be a challenge as the PE firm is largely a minority investor.
At the end of 2009, we also start to see the emergence of the Indian Corporate PE firm. Today, the ADAG Group, Tata Group, Aditya Birla Group, Religare Group have all set up PE businesses and are in various stages of fund raising. It will be interesting to see how successful they are in their fund raising and how much competition they will give to other domestic funds and foreign funds.
Looking forward, year 2010.
For 2010 the agenda has got to be for the PE firms to come together and begin to talk to the regulator to create specific regulatory provisions for PE firms. This will have a huge impact on PE investing and with the right forms of regulation, will attract many more PE firms to come to India.
Deal pipeline will be strong, as confidence in Indian businesses grows, but alternative sources of capital will be a challenge; and hence we will see more quality deals in 2010.
It is also likely that more exit transactions will emerge as PE firms get ready to sell their holdings through IPOs or through strategic sales, having held these investments through 2009. This will enable them to demonstrate success to their investors (LPs) and will help them to raise their next funds.