Q&A: Tata Opportunities Fund's Paddy Sinha

Q: What is your view on the macro situation in India, given the currency volatility in recent months?

A: There's been a wobble this year, for sure, and I've heard some chatter in the last few months about LPs putting more money into the US and Europe rather than emerging markets in Asia because the risk is lower. Fortunately, November has been a recovery period, and from a long-term perspective, inflation rates have come down substantially. About five years ago inflation was in the high single digits, but now it's 4-4.5%. The last time the currency came under serious pressure was during the taper tantrums in 2013. The current account deficit, inflation rate, and foreign exchange reserves were in a different order to what India has today.

Q: What impact are the upcoming elections likely to have on the investment environment?

A: If there is uncertainty it will impact the stock market, which may not necessarily be bad news for private equity. One of the challenges in India is the effect benchmarking to public markets has on private markets entry valuations. I think in general there will be a positive correlation between the markets and the numbers for the Modi government. As for the broader policy implications, we've had the GST [goods and services tax reform] and the IBC [bankruptcy code], but I wouldn't say this administration has consistently delivered big-ticket reforms. The Modi government is more about the nuts and bolts. And then some of the clean-up is court-led. What really bogged down the previous government were the corruption charges, much of it linked to the allocation of natural resources. Now the supreme court has made sure everything is going to be auctioned.

Q: There has also been a more general improvement in governance…

A: Those improvements – and demonetization as well – have led to a formalization of industry in India. A lot of our investees previously didn't have a level playing field because small and some medium-sized companies didn't follow the rules, didn't pay their taxes, or were not fully compliant. That has changed. In some industries market share is shifting to our portfolio companies, which are more institutionalized. This is also helping to broaden the investable universe. There was a period five years ago where private equity was more focused on export-oriented sectors and consumer where regulation mattered least. We took some contrarian bets like Varroc Engineering that have worked well for us. It's important that the investable universe continues to grow. Improvement in rule of law and governance means PE investors will have the confidence to go into controlling positions across different industries.

Q: How significant is the rise of control deals?

A: There will be more of them, but India will continue to be more of a minority growth market. We see people doing platform deals – if you can't find any assets at reasonable valuations, sometimes it is easier to back a team and build a platform around it through add-on acquisitions. That is happening quite a lot in financial services. In addition, some entrepreneurs have seen colleagues make significant amounts of money by selling to private equity and they want to do the same. Then there have been changes in businesses that were once passed from generation to generation. I recall about 10 years ago, a well-known Indian group sold its business and the promoter was asking, ‘What am I going to do now? What am I going to do with the money?' The mindset is different now.

Q: To what extent can buyout opportunities outside of the distress space be linked to the IBC?

A: We do find corporate groups are looking to streamline, driven by debt issues or a desire to have fewer but larger businesses. We find it with some stand-alone companies as well, where the owner is under pressure because he has borrowed money by pledging shares and a drop in the share price triggers capital calls. What the IBC has done is brought in a realization that you can't walk away from bank debt any more without significant implications.

Q: Are you seeing more larger transactions as well?

A: I would still argue that the sweet spot is the upper end of the middle market, deals of $30-150 million. There are more larger transactions than in the past, but the supply of capital matches that increase. All the global and pan-regional funds, because they have moved up in size, are targeting bigger tickets, so anything below $150 million becomes less viable. At the same time, sovereign wealth funds want to do more direct deals. The mid-cap segment is attractive because there aren't too many India funds of around $500 million. Target companies tend to be institutionalized, but they still require quite a lot of hand-holding as they move to the next phase of growth and perhaps start doing acquisitions. For example, we helped Varroc finance and integrate a large global acquisition.

Q: Varroc was the first exit from Fund I. What other progress are you making in this area?

A: Varroc was first exit from Fund I, but it returned about 50% of the corpus. We have seven companies in total and there are advanced discussions involving four or five. Hopefully in the next calendar year will be quite prolific. As for exit channels, we don't like to list a company unless it is of a certain size, otherwise there won't be interest from large institutional investors. And then, if an IPO is a possibility, a trade sale is also a possibility. This could be to a financial sponsor or to a strategic that comes in as a non-controlling investor alongside the existing entrepreneur because they feel some mutual value can be added. Generally, exits have become more consistent in India, which is helpful.

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• Topics
• South Asia
• GPs
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• India
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• Growth capital