India Awards: Financial Advisor of the Year – Ernst & Young

Q: What do you see as the principal challenges facing private equity firms investing in India?

A: There are three levels of challenges. First, valuations continue to be aggressive and that must change if you want to see more deals happening. Most of the sectors in question have shown some amount of stress and this is largely concerns working capital or lack of capital or getting projects off the ground on time. A rationalization of valuations is key. Second, there is a need to morph business plans and understand the issues we are currently facing. People continue to push an idea of a business plan in a particular direction and it makes it difficult to execute. Third, there remains a problem in terms of getting the right people - the right managerial talent and people with execution ability.

Q: To what extent is there a disconnect between investor and entrepreneur expectations?

A: The biggest issue for entrepreneurs is having the ability to think in terms of scale and think outside the box. Sometimes what happens is they go the extra mile to make the impossible possible in terms of projects or projections. In the promoter's mind valuation is always a goal they want to put down as the most important metric but unfortunately PE guys are not on the same page. When they look at an opportunity for investment they are already gearing up for a much lower price and a faster execution time. Sometimes this is due to a lack of understanding of the business or the fact that the promoter is inflexible with the business projections.

Q: What can financial advisors do to help in this respect?

A: As a financial advisor the onus is on us to smoothen the process. It is about going out there, working closely with the promoter group and giving them a true picture of what the valuation should be. We also have to talk to the PE guys and short-circuit their learning process in terms of understanding the business, the people and the operations and thereby getthe deal on track. Often it's not only about the valuation but also about understanding the business and the regulatory environment, and most importantly, building the connect between the promoters and the fund managers. This is where advisors like us need to play a role.

Q: Given the problem with valuations, what are your expectations for the next 12 months?

A: I I have spoken to a lot of PE firms and they have the war chest but, while nobody is looking for a fire sale, everybody wants a fair deal. I have not been to any company in the last 3-5 months where there isn't a focus on growth. Nobody is envisaging a Doomsday situation. Deals will happen but, only if both sides are fair to each other. The next 12-18 months are going to be particularly challenging for corporate India. We will see some corporate being restructured and organization will look at making better use of their resource. The most scarce being capital. Today, managing your working capital is an important issue for corporate India and the private equity houses' given their exposure to their portfolio companies. In my opinion it will emerge as a big differentiator. How efficiently do you manage your money, how can you be successful in the tough times, those who succeed, will come out winners on the other side.?

Q: In which sectors do you expect to see the most private equity activity?

A: I am still bullish about the power sector. The key is having access to coal reserves. Pharmaceuticals and healthcare look exciting as well, and so does education. With regard to education, it's difficult to do deals in a regulated environment but people will find opportunities in vocational training and internet-based services. Finally, anything to do with domestic demand and consumption will continue to be front and center for PE firms.

Q: As the industry evolves, what changes have there been in the way that financial advisors deploy their resources?

A: Where we have been successful is primarily around understanding the sector game. Over the last couple of years it has become very important for promoters and managers to believe that when they are in discussions with a intermediary there is not only a certain level of commitment to the process but also a level of market and sector knowledge prevalent in the team. Most investment banks have a sector leader and then a lot of people on the team who are generalists. Earlier it was enough for banks to have this sector-focused team leader and the rest as floaters, but that era has gone. Promoters want to find local knowledge and experience at all levels. They know that if you have the right kind of people working with them - people who have some emotional connect with the deal - and it's not the team leader carrying the whole burden, the results will be better. That is really what has held us in good stead and we will continue to invest in that kind of expertise.

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