 "From despondency to hope in one year")
Roughly half of $40-bn legacy investments doing well and will find exits: Puneet Bhatia
Year 2014 has been a strong period for us. We made three new investments and headway on other contiguous opportunities in the distress and special situations space. The most significant event in 2014 was the change in government and a very progressive leadership team, installed with a pro-growth and development agenda. It might look trivial in hindsight but the outlook prior to the election results was challenging enough to deter committing for additional capital. India Inc moves from despondency to ecstasy and future challenges will be the inflated seller expectations as well as competitive intensity increasing, with capital chasing deals in a more positive milieu.
Challenges
The long-term growth story is compelling and we generally tend to view any cyclical weakness as a good entry point into this market. Valuations are optically challenging, but not in the context of the structural and cyclical growth rebound that is likely to unfold. One has to be selective and play to one's strengths while defining the investment strategy. We believe reversion to secular growth trends will manifest strongly, with Indian promoters making great partners. So selective investing will be the mantra to navigate this market.
Major changes
The 2014 themes were fourfold: Secondaries, more control-oriented transaction flow, rise of digital and value-added investing. As the markets recover, we believe legacy private equity (PE) deals will seek exits, leading to greater flow of secondaries. The trend of families looking to exit or shed business lines to de-lever will snowball. Online companies have absorbed almost half the PE flows into India this year and this investment theme will sustain given the strong growth in online sales.
Given that most PE players are now a decade old in India, the families are more discerning about which partner to work with, based on their records and what value these firms add, leading to more proprietary or customised deals.
Exit scenario in 2014
It is still nascent, but the exit funnel is solid and will see an uptick over 2015 and 2016. Exits to date have been a small proportion of the aggregate PE dollars invested, but remember that the markets have been dormant and a large part of the investments were made at the peak of the previous upcycle. Roughly half the $40-billion legacy PE investments are doing well and will find an exit through an IPO or secondaries, while the other half will have to wait until the latter half of the recovery cycle given their high watermarks and cyclical nature of the end-sectors.
Major trend in 2015
Yield plays in India will be attractive and hunted down given pressure on yields across the globe, and investing in distressed assets and resolutions will take off though these themes require specialised skills. As in 2014, family exits, divestitures, secondaries will accentuate while specialised and more customised investing will be more visible.
The other half of PE flows will be bets made on India's growth reviving and across macro themes, and hence will be less price- and control-sensitive.
Puneet Bhatia,
MD & country head (India), TPG Capital
MD & country head (India), TPG Capital
It was a seminal year for the venture business in India. Year 2014 saw the highest amount of activity ever seen in the space, the largest number of new investments made, and the largest amount of capital invested in India. It was a busy year for us at Sequoia Capital as we hadn't seen such a larger number of high-quality ideas and entrepreneurs before. We continued to stay focused on seed, venture and early-growth opportunities in our chosen sectors of technology, consumer and healthcare and continued to find exciting opportunities and entrepreneurs to back. We also participated in the next round of funding for many of our successful companies such as Zomato, Truecaller, Practo, Koye Pharmaceuticals, etc. In addition, we doubled down on our company building efforts through strengthening our team, as we believe talent and support will be key to success for young companies and entrepreneurs.
Major changes
Year 2014 saw an explosion in mobile internet penetration and terrific metrics on user engagement. These, coupled with the availability of capital to acquire customers to attain market leadership, led to a quantum jump in the total amount of capital raised. We also saw the phenomenon of using capital to accelerate even growth in the offline space.
Exit scenario
It is still early days to expect large exits through initial public offers. Most of these companies are in hyper-growth stage that requires more capital. What we are likely to see is consolidation through mergers and acquisitions, especially in spaces where clear leaders have emerged.
Major trends in 2015
We are in the early days of online models disrupting the offline world through better efficiencies and this trend has a long runway ahead. In any such long-term trend, there will be excesses and unjustified exuberance, which might create small periods of hype. These periods will attract a lot of new capital, looking for easy returns. Our challenge through 2014 has been to navigate well through these markets and continue to find great opportunities early. We expect these challenges to continue in 2015.
Abhay Pandey,
MD, Sequoia Capital
MD, Sequoia Capital
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More investments will flow into infra, insurance: Ravi Lambah
Year 2014 has been a fairly active period for us, during which we made a combination of public and private investments across sectors. For context, 2013 was a year where the public equity market in India was rather turbulent. Year 2014 has been different in the sense that we found a lot of attractive private opportunities as well.
Challenges
Overall, the consumption theme is strong in India and consumption-driven sectors such as financial services, consumer, healthcare, technology and agri-business, are attractive for us. The thesis of the investment is more important to us than what is happening on a daily basis. A key differentiator in our operating model is that we have the flexibility and this enables us to adapt to different types of market environments to generate sustainable returns.
Major changes
There has been a significant increase in the number of secondary deals in 2014 and we have been actively looking at these.
Exit scenario
From our perspective, this is less relevant because we invest out of our balance sheet and are long-term investors, with no compulsions to exit. Our exits are determined by our intrinsic value tests versus the current price. If we divest out here, it means there are better investment opportunities elsewhere, either within the market or outside the market.
Major trends in 2015
The sectors that attracted investments in the past will continue to do so. In addition, with greater regulatory clarity, you could see more investments in infrastructure and sectors such as insurance, once the regulatory cap is increased. Technology is disrupting business models in several traditional industries and you are likely to see more investments here, as we saw in e-commerce last year. We are positive on the opportunities we see across the market, as new categories in consumption-driven sectors open up.
Ravi Lambah,
Senior MD & Co-Head (India), Temasek Holdings
Senior MD & Co-Head (India), Temasek Holdings
Although we did not close any new investments in 2014, we were quite active in evaluating opportunities across sectors. We continue to look for good companies with strong market position. We have focused on building on our investment in CARE Hospitals and consolidated our ownership in CIBIL through TransUnion. We are now the largest shareholder in CIBIL. We sold our 30 per cent ownership in CAMS to the National Stock Exchange. However, the environment for new investments has been challenging, due to a meaningful run-up in valuations without a corresponding uptick in growth.
Challenges
To overcome the deal flow challenge, we have continued to focus on strengths, including sectors where Advent has strong operating partners, and focus on mid/large-sized deals.
Major changes
In 2014, we saw more instances of control/buyout situations with founders/promoters willing to consider the option. Private equity players are more focused on exits, especially for investments made prior to 2007. As a result, we are seeing more instances of secondary market exits. With improvement in investor sentiment as well as an increase in global appetite for India paper, equity markets are now open for capital raising, which is limiting the PE deal flow.
Exit scenario
The sector has started seeing an exit cycle for investments made. This has been much better than what we have seen in previous years. However, most of these exits have been secondary deals to other private equity players or stake sales through block trades in companies that are already listed. PE exits in the form of initial public offerings (IPOs) haven't yet happened.
Major trends in 2015
The new year will see a lot of focus on exits through IPO or capital markets with players investing again to meet primary capital requirements of companies (as the capital expenditure cycle turns). In 2014, most of the deals were secondary in nature.
Shweta Jalan,
MD, Advent India PE Advisors
MD, Advent India PE Advisors
Vishakha Mulye
Year 2014 was one of achievement, transformation and progress for us. We concluded fund closings, invested capital in new companies and new ideas, and continued returning capital to our investors. The biggest challenge for everybody was to re-calibrate growth in the light of the election results of May 2014. Now the growth expectations of our various stakeholders have been scaled up. So, 2015 will be a busy year for everybody.
Challenges
For us, life revolves around raising capital, deploying it and then realising it for our investors. Each of these activities has its own set of challenges, which are different. At the beginning of the year, we were strongly focused on concluding the final close of AION (a JV between Apollo and ICICI Venture, which happened by April at $825 million. Across the year, we were focused on doing new deals across three different strategies - our mid-market growth PE fund-3, our high-yield real estate fund-2, and AION. In the process, we deployed $150 million across various new deals. We successfully closed exits worth $150 million across various deals.
Major changes
The change in the business environment has brought many good companies and promoters back to the capital-raising cycle. Otherwise, they appeared to have become passive during the past few years. That is a big positive for our industry.
Exit scenario
The initial public offering (IPO) market has not come back yet, but it is showing very promising signs for the coming year. Therefore, exits would have happened through secondaries, trade sales, etc. From our perspective, our exit track record of $900 million over the past five years has been largely outside the capital markets. So, we were relatively agnostic to the IPO scene.
Major trends in 2015
The biggest trend in the New Year could be a surge in capital raising by companies, promoters, groups across sectors and strategies as government looks focused on taking the reform agenda forward.
Vishakha Mulye,
MD & CEO, ICICI Venture
MD & CEO, ICICI Venture
Year 2014 was great for Carlyle in India. Despite a difficult environment, Carlyle was able to achieve excellent returns on its exits through the public market, as well as strategic sale. Carlyle's Growth Capital team exited Tirumala Milk Products, Cyberoam and Repco Home Finance. The team also invested in Newgen Knowledge Works.
Challenges
Despite a challenging environment, We have been able to demonstrate an impressive track record owing to its strategy of partnering with self-driven promoters, and an emphasis on companies with a track record of historic growth, combined with a sound prognosis of future growth and profitability.
Major changes
The past year has been significant with numerous changes in India, with a new, business-friendly government coming to power at the Centre, which has improved investor confidence. Its initiatives in improving the infrastructure and creating an economically flourishing environment will help further stimulate the growth. One of the changes we are seeing is the increasing willingness of hard-working promoters to partner with marquee private equity players. The promoters are increasingly realising that such partnerships help grow the entire pie, thereby generating attractive financial returns for all the parties involved.
Fund-raising by GPs
Given the complex fund-raising environment, general partners would be able to raise funds by demonstrating a good track record of successful exits and value addition to portfolio companies.
Major trends in 2015
The major trend will focus on investing broadly in quality businesses led by a strong management team. The discipline on valuation will remain critical. Investment opportunities will range from minority stakes, secondaries, buyouts, and controlling stake transactions depending upon opportunities. There is a good pipeline of initial public offerings lined up for the coming year.
Shankar Narayanan,
MD, Carlyle Asia Growth Partners
MD, Carlyle Asia Growth Partners