Specialization key to success in India PE – AVCJ Forum

Speaking to the AVCJ Forum, Pavan Gupte, managing director at Samena Capital, said that returns from India for global investors are at par or better than in other regions, according to LPs he has spoken with. Investors point to the growing number of profitable exits recorded by Indian GPs as evidence that local managers have gained experience and confidence in bringing value to their portfolios.

Nevertheless, there are concerns about certain aspects of the market, particularly the high valuations for Indian companies. While acknowledging the risk of overpaying for assets, GPs argue that some investors fail to take into account the strong growth characteristics of India’s consumer economy, which is the focal point of most PE activity.

“In India, the domestic consumption story has much longer tailwinds to it for many decades to come, and therefore markets value the fact that a consumer company can actually grow for 30 or 40 years at a certain pace,” said Sanjay Kukreja, a managing partner at ChrysCapital.

Confidence in the country's growth story can lead to behaviors that might seem counterintuitive: GPs described situations where they have knowingly paid a premium to a company’s true valuation – if only a small one – in order to secure their place in a deal. They might also agree to exit at a slight discount in order to make the company more attractive to potential buyers.

“Sometimes you're buying high and you're selling low conceptually, but as long as in between there's been enough growth and you've done enough to appreciate the business, you've overall made the sort of returns that you're looking for,” Samena’s Gupte said.

Buyouts are also on the rise in India thanks partly to an increasing preference among founders to leave capital to their children rather than a business they might not be interested in running. However, the growth in control deals has been hampered somewhat by more difficulties in adding leverage compared to Europe or the US.

Investors largely consider the gradual development of buyouts to be a minor issue, since investing in India tends to be highly relationship-driven anyway: a minority shareholder with strong ties to a company owner can often persuade them to implement desired changes without control. But this points to the most important skill that India-focused GPs need: the ability to judge an investee’s character.

"Over the last 24 years that I've been investing in India, every single case where private equity investors lost money probably boiled down to integrity. You can't wake up a guy who is pretending to sleep,” said Shankar Narayanan, a managing director at The Carlyle Group. “It’s very important to take a judgment call: will he treat you fairly as a partner, will he comply with laws, will he treat his employees well, because the culture he builds in the organization is far more important than anything else.”

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• Topics
• South Asia
• GPs
• Investments
• India
• ChrysCapital Management
• Samena Capital
• The Carlyle Group
• AVCJ Events