 "Domestic consumption to fuel PE investments in India: J M Trivedi")
Actis was quite bullish when it made investments in Nilgiris, but later things did not go according to your projections. What lessons have you learnt from this deal? Will you blame the lack of clarity in the foreign direct investment (FDI) policy?
Nilgiris was a franchise model and hence FDI in retail was not a constraint. Having said that, opening up FDI in this sector could have created more attractive exit options for us. While I cannot comment on the transaction as we have a non-disclosure agreement on this, I am happy to say that Actis significantly improved the brand, scale and operations of the company during its investment period. The number of stores increased from 30 to 140 and Nilgiris was a profit-making company when we exited.
The Indian PE sector is witnessing many exits from marquee funds at a loss. Where do you think the sector is headed?
PE investments in India have gone through various cycles. There was a time during 1995-2004 when the industry was in its golden period. While the economy was growing at four or five per cent, the competitive intensity was low and demand and supply of capital was well-balanced. Industry made good returns during this cycle. IDFC, UTI Bank (now Axis Bank), IIFL, Jyothi Laboratores, Glenmark and Punjab Tractors were some of the investments made by Actis during this period and which were exited very profitably.
The demand for capital grew at a massive rate between 2005 and to 2007 from $2 billion to $16 billion, riding on high economic growth of nine per cent. This, however, resulted in increased competition and a huge inflow of private capital. There was too much capital-chasing deals and valuations were high justified by high earnings growth during the 2006-2008 period. After 2008, the earnings growth came down and the exit multiples were lower than entry multiples. This resulted in the industry making lower returns for deals done during this cycle. Actis has, however, continued to make profitable exits from its investments made during this period - Paras pharmaceuticals, Avtec and Ceylon Oxygen in Sri Lanka are some examples.
With a new government in place at the Centre, do you expect investments to pick up by Actis?
The investment climate has certainly improved and private investors, including us, are keen to invest here. India is a growth capital market and the investment rate for PE is linked to capex on the ground. It is important to note that a lot of capacity was lying idle for the past two or three years when economy slowed down and capacity expansion will take place only when capacity utilisation improves.
Actis has kept away from investing in real estate here while other funds are investing aggressively. Which are the ideal sectors for investment for your fund in the New Year?
We are investing in the energy sector from our Energy fund – especially in power generation. Our focus is on alternative energy, especially wind and solar. From our PE fund, we are investing in sectors riding domestic consumption such as consumer, healthcare and financial services - be it home and personal care, QSR (quick-service restaurants), healthcare delivery (diagnostics and hospitals), or manufacturing (pharmaceuticals in the healthcare sector). We also invest in the industrial sector, which should benefit from revival of capex cycle.
Our strategy is to focus on control or significant minority deals where we can partner with promoters / families to help them professionalise the management team and improve operations to enhance value. We have industry advisors who are retired CEOs of large multinationals and a pool of successful CEOs who would like to work with us in our investee companies. This is a win-win solution for families / promoters, CEO/management team and us as it can create significant wealth for all.