The great India debate

This is the sentiment LPs expressed at the 2010 AVCJ India Private Equity & Venture Forum held in Mumbai. And while competing emerging markets such as China, Brazil and others in Africa and South America may offer attractive landscapes – and potentially higher returns on deals – investment into India will only continue, and will improve as per capita income increases, thus prompting additional spend from the ground up.

As Hiromichi Mizuno, Partner at Coller Capital, remarked, citing his firm’s own Barometer of LP opinion, India consistently ranks in the top-three most popular Asia Pacific investment destinations for buyout investment, and sits alongside China as the most popular growth capital destination. Yet, the questions about whether GPS in Indiacan adequately rival the public markets and deliver real returns to their LPs remain open.

While funds proliferate, LPs hesitate?

To some extent, Indian private equity is proving a victim of its own success, with some LPs now eyeing its expansion warily. According to Anubha Shrivastava, MD at CDC Group, the plethora of new funds - especially those spun out from more established entities - “complicates the landscape and confuses LPs.”

Shrivastava’s sentiment was echoed at the Forum’s LP panel, in which fund-of-funds representatives unanimously said that there are too many GPs in India today, further noting that in five years, the landscape will not likely change. “There are way too many now,” emphasized San Diego Country Employees Retirement Association Investment Office and Head of Private Equity Yegin Chen, without citing an endpoint for consolidation.

This trend is set to perpetuate as spinoffs of independent fund managers into their own funds looks to be an ongoing narrative. While nailing down a definitive number of funds in India is tricky – effectively depending on who is asked – some estimate the number of active funds in India at around 400. AVCJ Research data notes that approximately 160 of them are home-grown, and that there are a further 380 regional or global funds with an India mandate.

As a GP, Sachin Bhartiya, Partner at Lighthouse, hailed the spinout trend as “good for the investors and the industry.” He added that, in the context of India’s overall economy, $1.5 trillion in size and growing at 9% per-annum but with approximately 1,000 listed companies more than $20 million in market cap, “What is the requirement of fund managers and capital for taking this economy to the next level?”

Yet, while funds may be prevalent on the ground, commitments into India may not change. The consensus on the LP panel is that fund-of-funds won’t necessarily set a monetary goal for their spend in India, but they will look to continue at the rate of investment.

According to Head & Chief Investment Officer of the International Finance Corporation Nikunj Jinsi, the amount his fund aims to invest in the market won’t decrease, but it won’t spike significantly, though he would like to see more geographic diversification from fund managers; not just sector diversification. Maninder Saluja, Co-Head of Emerging Markets PE, Quilvest, added that Quilvest will invest at the same pace in the short-term future, but may look to increase its exposure in areas such as venture.

Managing Director of JP Morgan Asset Management’s Private Equity Group Eric Chan and Partner at Adams Street Partners Pinal Nicum left the question open, saying that fund-of-funds are constantly looking for opportunities, and their future targets will depend on the GPs.

GP experience and the art of patience

With these caveats in mind, coupled with India’s rocketing economy, investing in the Subcontinent does require strategic maneuvering, and many funds, especially those with pan-regional roots, have already adjusted their operations to fit the market. Puneet Bhatia, Managing Director & Country Head, TPG, admits that India requires “a lot of adaptation,” and that “we’ve had to figure out new ways of investing.” He specifically highlights TPG’s new focus on “shared investing,” backing existing management teams but retaining “enough influence to make a difference.”

While some industry insiders cited their apprehension about entering into such deals, LPs who spoke with AVCJ largely said that co-investing is simply a given. While the model may not be ideal to groups accustomed a high level of managerial autonomy, the general sense is that there are avenues to create a control model that makes investors comfortable, especially as fund managers in the market become more experienced. JM Trivedi, Partner at Actis, highlighted his own firm’s early decision to prioritize control deals to drive growth for competitive reasons. “We felt that simply riding top-line growth was not going to give us PE-type returns.”

Aside from India’s management model, Sandeep Naik, Co-Head, of Apax Partners India, said that his firm has adapted itself away from its big-ticket buyout focus because “in India, the growth in India is for real.” That strategy, which is sound given India’s opportunistic landscape, is also reflective of India’s exit environment. “In India you don’t see so many strategic sales,” Saluja said. “You can’t expect anything but IPO exits now; you need to be patient.”

On the M&A side at least, the environment has pluses as well as hurdles. Punit Shah, Head of Private Equity Tax at KPMG, notes that “there are enough and more provisions in the tax code that we have in India which promote M&A ... you can’t say there are no tax incentives.”

Shankar Narayanan, MD at the Carlyle Group, added that the rate of change in India’s economy is accelerating, but there is also a need to wait for opportunities to develop. “You see the emergence of a lot of small-to-mid-size companies that could really become the transnationals and multinationals of tomorrow,” he said, adding that the role for Carlyle and its peers is to be “catalysts for change.”

A question of returns

Though opportunity may be abundant for the funds that prove to be flexible and patient enough, what riches are in store?

Speaking of return potential, Wen Tan, Managing Director of Squadron Capital, noted that in 2002 and 2003, returns upward of 12, 13 or even 20-times were common, but that vintages from 2009- 2011 can be expected to see “1.5 to one-point-something times return.” He reminisced that the best vintages came between 2005 and 2007, but that those sorts of high returns are more difficult to come by.

“I think in terms of the concerns, the most troubling issue is valuations, as most investors probably know amongst the major Asia private equity markets. India has been the most expensive and remains the most expensive in the current cycle,” Tan said. “The issue now with some of the current vintages is really how GPs can deploy the cash in relatively attractive situations. If you look on average across the portfolio, profit growth is 15-20%; if you compound that by four or five years, looking at a median portfolio, they will probably get only 2x, which is not necessarily anything to write home about.”

The scope of deals is further dependent on the capital flowing into funds. While this flow is robust for the meantime, Ayaan Adam, Head of Financial Institutions and Private Equity Manager, South Asia, for IFC, offered a sobering perspective: “There is money in Asia because people don’t want to invest in Europe and the US. How long will that last? I don’t know.”

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• Topics
• South Asia
• People
• LPs
• Performance
• Buyout
• Expansion
• Actis Capital
• J.M. Trivedi
• TPG Capital
• Sandeep Naik
• CDC Group
• Anubha Shivastava
• Hiromichi Mizuno
• Coller Capital
• International Finance Corporation
• Puneet Bhatia
• Apax Partners Hong Kong
• Shankar Narayanan
• The Carlyle Group
• Squadron Capital Advisors
• Wen Tan