 "Indian PE comes of age")
- Fifteen years ago, India was a small venture capital market that saw ideas and early-stage companies getting funded with small amounts of capital. In those days, I recall evangelising and educating about this product called PE to entrepreneurs and institutions alike. Today, Indian PE covers the entire product suite from venture to growth equity and buy-out. Along the way, there has been a transformation in the mindset of the stakeholders.
- Annual PE investment in India has gone up to $18 billion from less than a billion dollars in 2000. PE now accounts for around half of the foreign direct investment coming into India
- About 40 billion-dollar companies in India have been created with the backing of PEs
- There is evidence to show PE-backed companies have demonstrated faster growth, generated more employment and are generally better governed
All this has brought PE to the limelight - to the headlines from the supplement pages, to a full-time business from a part-time activity, attracting serious amounts of capital and talent, akin to any other large sector. Along the way, there have been several paradigm shifts.
I am pleased that PE has emerged as a full spectrum solution provider to entrepreneurs, in building businesses to scale, enhancing productivity of invested capital and unlocking the value of companies facing near-term difficulties.
Let me cite a few examples from my own experience on the role played by PEs beyond providing capital.
- PEs have stepped in to resolve shareholder disputes (we backed the founder promoters of Milltec to buy out the remaining shareholders)
- Backed companies in game-changer acquisitions, which in some cases triggered consolidation in sectors (PVR's buyout of Cinemax made it number one player in the country with leadership in key cities)
- Enabled carve-out of businesses from larger groups, empowering management teams to take bold steps (the management team of VA Tech backed by PE, bought out the India business from the parent. Subsequently, it was also able to buy out the Austrian parent company as well)
- Provided last-mile capital to engineer turnarounds in high-quality assets (took control of Vikram Hospital and resolved the financial stress to unlock the full potential of the hospital)
One of the setbacks for the PE sector has been the lack of exits and the high entry valuations. In this scenario, fund managers also have not been biting the bullet and in making exits at below cost or at par, after holding on for five to seven years. There are probably two key reasons for the lacklustre performance for some funds. One is collapse of the financial sector in 2008. Two, collapse of the infrastructure sector and, for a good part, the real estate sector as well in India in the intervening years.
Having said that, the future is going to be vastly different from the past. There is a huge exit mindset at the time of making the investment by PE managers. PE to PE exits will be a major source of exits, reducing the dependence on the public markets. In the past decade, the market has separated the wheat from the chaff and fund managers are exercising great financial discipline. Combined with the maturity of fund managers and optimism around the economy, I expect India will continue to be a preferred emerging market destination for limited partners.
Much of the credit for evolution of the PE sector goes to entrepreneurs, who have changed their lens and embraced private equity as a true long-term partner in their journey.
This has paved the way for better communication and more compelling partnerships between the PE and the entrepreneur, and has improved the overall outcome for PE-invested companies.
The author is founder of investment advisory firm Multiples