 "Roots in place, time to surge ahead")
Next few years will see great value creation: Mathew Cyriac
Year 2015 has been good for private equity (PE) in India, with nearly $12 billion deployed in corporate transactions. Real estate PE investments were good, too, though those were lower than 2008 levels. In 2015, Blackstone committed $1 billion across both corporate and real estate investments. The year also saw strong exits by PE funds, realising $6 billion. Blackstone exited Agile Electric and CMS Info Systems fully, and S H Kelkar partially, through an initial public offering (IPO). With this, Blackstone has realised $1 billion to date from its India portfolio.
The deal market (including IPOs) has derived comfort from improving macroeconomic conditions and demonstrated commitment of the Narendra Modi government to fiscal discipline, good governance and reforms. Specific initiatives such as the structural overhaul of foreign direct investment (FDI) policies, real estate investment trusts (Reits), moves by the Securities and Exchange Board of India (Sebi) to streamline IPOs, a new alternative investment funds policy regime and clarifications on applicability of Minimum Alternate Tax to foreign investors have been welcomed. In contrast, public markets were muted due to weak earnings and poor sentiment, as corporate India is divided on the progress made by the new government.
The year saw the growth of direct investment by sovereign funds, pension funds and insurance companies (Fairfax), which have traditionally invested through PE funds. In addition, we witnessed some large club deals, although primarily in venture capital investments, especially in the commerce/internet space where $3 billion was invested.
Year 2015 marks the end of a decade of substantial PE investments in India. This decade has been marked by a mixed record, with some big successes and a few disappointments. Looking back, the poor performance of PE investments can be primarily attributed to regulatory turns, fraud, poor corporate governance and choice of sectors. Looking forward, the next few years are likely to be a period of great value creation for the PE sector for the following reasons.
First, Indian macroeconomic conditions look favourable, aided by declining commodity prices. In addition, India is partially insulated from the global economy, as growth is driven primarily by domestic consumption, supported by favourable demographics.
Second, market participants have learnt from early mis-steps and developed differentiated investing styles. This has led to more discipline, despite added momentum from the new investors and large club deals mentioned earlier.
Third, deal volumes are increasing across transaction types, specifically (i) control transactions; (ii) corporate divestitures; and (iii) PE secondaries. While PE funds have not significantly invested in distressed assets to date, the Reserve Bank of India's focus on resolving non-productive assets might create PE-bank-promoter partnership opportunities.
Finally, PE firms have developed an ability to make successful operational improvements at portfolio companies, such as Blackstone's contribution to Intelenet and CMS. Indian entrepreneurs have started welcoming PE partnerships on the back of success stories of value creation. In addition, professionals are increasingly enthusiastic about participating in PE-driven transformation opportunities. Also, IPO markets in India have started ascribing premium valuations to PE-backed companies.
Blackstone continues to remain positive about the Indian market and could make significant new investments over the next five years, having raised its latest global private equity fund of $18 billion and real estate fund of $15 billion.
Mathew Cyriac, Senior Managing Director, Blackstone Advisors India
Sanjay Nayar
Year 2015 was punctuated by a number of notable macroeconomic events that made for an interesting year in private equity (PE) investment and exits - from the US Federal Reserve's steps towards normalcy juxtaposed with the European Central Bank's yo-yoing attitude towards quantitative easing, to the year-long volatility across commodities and global stock markets alike, to India's ongoing economic rejuvenation.
As a global investment firm, we found there were new considerations in 2015 than in years past, but our core investment tenets remained the same. Central to our investment theses is that volatility can generate opportunities. The key is to remain patient and disciplined until the right opportunity, whether that occurs through a price correction in the market or through an opportunistic management team that finds private equity helpful to capturing market share while its competitors struggle amid the volatility.
Likewise, 2015 underscored the importance of remaining flexible. PE capital is not the only type of funding helpful for companies to grow. Debt financing can often be equally important in helping companies capture opportunities, for example. Being able to offer companies the tailored financial solutions that suit their specific needs is a coveted resource when navigating volatility.
We put these principles to work in our newly announced partnership with Emerald Media, a platform investing behind fast-growing, mid-market media and entertainment opportunities in Asia. KKR had been interested in this space for a long time given the natural drivers of a growing, young population with increasing wealth and leisure time. Yet finding the right partners was a challenge. The 2015 landscape presented an ideal backdrop for KKR and our partners at Emerald Media to explore attractive opportunities at reasonable valuations.
Similarly, we were able to find a unique financing solution for the team at JBF Industries as it sought to expand its international footprint and take advantage of the momentum of the Make in India campaign. The global manufacturing landscape was a helpful backdrop for these types of opportunities.
This year, India also witnessed unprecedented demand for innovative and integrated financial services products, as a result of rising entrepreneurship across sectors. Avendus is a world-class platform built to deliver solutions to meet this demand by offering diverse alternative investment products and wealth advisory services. Amid this backdrop, we will invest in Avendus to fund the build-out of the company's merchant banking platform. The transaction is subject to customary regulatory approvals.
Looking ahead to 2016, a year already marked by a higher rate environment, we will continue to stay nimble in the types of capital we can provide companies. Rising rates will create new capital requirements for companies, which creates opportunities for diversified investment firms. We will also continue to focus on an area we call 'solutions investing', where we invest in companies that provide a business solution to problems facing society. Examples in our portfolio are support for food safety and security, financial inclusion, and the environment. There are also increasing opportunities around e-commerce and new technology, which are driven by core demographic tailwinds across emerging areas of Asia. Ultimately, we'll seek opportunities that are counter-cyclical, and we'll find management teams that can truly benefit from the experience and value-add that PE can bring, rather than merely chase the flavour of the day.
Sanjay Nayar, chief executive officer, KKR India
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Carlyle is highly enthused by the future we see for India. 2015 was a strong year and we see even greater growth on the horizon, given the country's position: Increasing domestic consumption due to growing levels of disposable income from a young population; a solid regulatory framework sprung from the work of several government agencies; a strong and capable capital market regulator; and a disciplined central bank delivering reliable monetary policy. All this has created the right atmosphere to unleash the brilliance and ingenuity of the Indian entrepreneur.
At Carlyle, we look to partner with these entrepreneurs and act as a catalyst to that growth by harnessing the full power of OneCarlyle. Through access to firm-wide portfolio companies and relationships globally, we are able to help our partnerships in areas such as business development, partnerships, joint ventures, market entry, and inorganic growth. OneCarlyle also gives our partners exposure to operational expertise through senior operating executives and advisors at Carlyle, including serving on investee company boards and mentoring promoters, all of which help our businesses achieve extraordinary success.
Our approach to investing remains the same, as we search for high-quality businesses with stable cash flows, led by high-integrity entrepreneurs driven to build long-lasting enterprises. In 2015, we invested in PNB Housing, mortgage finance arm of Punjab National Bank; DEE Piping, a producer of high-pressure piping systems for the power, oil & gas sectors; and Metropolis Healthcare, a chain of pathology laboratories. Carlyle India has a strong track record of exiting investments through a variety of channels, including sales to strategic buyers and through the public market. In 2015, we were able to successfully exit from our investment in Elitecore via sale to a strategic buyer.
For 2016, we see a deal pipeline, which is one of the best we have seen in the past 10 years. In the upcoming years, the story will be around consumer consumption and successful export-oriented companies that offer globally better products and services, which are cost effective, year after year. Sectors we are examining include financial services, healthcare, manufacturing, consumer, technology, and business services.
Carlyle is bullish on India and will continue to partner with passionate entrepreneurs of integrity to build the next wave of great Indian businesses.
Shankar Narayanan, MD & co-head, Carlyle Asia Growth Partners
The macroeconomic backdrop in 2015 was marked by the tailwinds of lower oil prices and increasing stability, with the powerful combination of Prime Minister Narendra Modi's visionary and laudable reform initiatives, paired with the steady hand of Raghuram Rajan at the Reserve Bank of India. The past year has been an active and productive one for Apollo's affiliates in India. The AION Fund, with approximately $825 million in committed capital (with co-investments that have taken it over $1 billion in investable funds) and a strategic partnership with ICICI ventures, had an active year with the consummation of two new investments in Mytrah Energy and Varun Beverages and its first exit, from Avantha Holdings. Apollo's global Fund 7 (with approximately $11 billion in capital) also made its first exit in the sale of its equity in Dish TV. Apollo Fund 8 (with approximately $18 billion in capital) reviewed a wide-array of investments with great interest and will continue to search for significant, high-quality opportunities in the coming year and AION will look to scale up its pace of investments in the coming year.
Challenges
Every year poses an array of challenges to our sector. We continue to maintain our focus and discipline and feel that our organisation is deepening its capabilities so that we can execute with speed and insight in a market that is not the easiest in which to source and execute a deep value-oriented approach to investing. With this in mind, we are adapting and approaching the market in a manner that capitalises on our personal and organisational advantages.
Exit scenario
The past year was a good one for achieving exits for our sector. The AION fund was able to execute its first exit (Avantha Holdings) and Apollo Fund 7 exited its equity ownership in Dish TV, which collectively generated approximately $400 million in proceeds and delivered attractive internal rate of return. We believe that 2016 will result in a surprising number of exits in both scale and variety.
Major trends in 2016
The greatest challenge facing India today lies in the high levels of non-performing loans (NPLs) in its corporate sector and the resulting stress in the banking system. This has led to unprecedented challenges, but also exceptional opportunity for those firms capable of providing the needed de-leveraging capital and those able to recapitalise those NPLs worthy of resuscitation. Identifying and providing capital to the best of these opportunities will be our principal focus over the coming year and we believe the new bankruptcy laws should be a significant facilitating factor.
Mintoo Bhandari, managing director, Apollo Global Management India Advisors
A lot was expected from 2015. There were indeed some disappointments and opportunities lost. But, there is no denying we are moving forward. For instance, the infrastructure space is sprouting opportunities at both ends of the spectrum: Asset level investing (road and power assets, for instance), driven by the need to de-leverage balance sheets, as also growth capital to fund the next wave of infrastructure projects (renewables, for instance). The focus for 2016 would be to build a war chest of deployable capital. With a reversal in interest rate cycle, asset valuations should improve, enabling increased trade/strategic sales. A case in point was our divestment in the city gas distribution sector, at a 4.1x cash multiple.
If one sees the real estate investing space, it has begun to show early signs of revival. Improving macroeconomic conditions and relaxed foreign direct investment norms should attract offshore capital. We have already seen this happen in large development projects in Bengaluru, Pune and Mumbai. Having said that, the risk appetite would continue to be guarded; hence expect to see structured transactions, albeit with more realistic, tempered return expectations. Much of this capital is being infused to kick-start stalled projects or provide liquidity to existing investors. For instance, one of our recent exits was enabled by a combination of project cashflows and infusion of structured capital by a global fund. A win-win for all sides, with our fund generating a 2.7x cash multiple. More such transactions can be expected in 2016.
On the general purpose PE front, 2015 saw revival in the initial public offering markets, providing exits for PE players. Increased consumption, reduced fiscal deficits, lower inflation should combine to provide an attractive investment environment. Services such as health care, logistics, energy efficiency companies, etc, should present attractive opportunities. With e-commerce redefining the business landscape, an extensive ecosystem has been created in the venture space. This space will not only see more action for venture capital firms, but start-ups funded over the past couple of years would also add to the PE opportunity pipeline, as these start-ups migrate to the next level.
The past couple of years, while providing an appearance of being listless from an investment standpoint, have been utilised well to deliver returns. This facet is as important as is raising new funds, as both aspects feed off each other. For instance, we have returned Rs 2,700 crore in the past three financial years, of which Rs 1,200 crore in FY15 itself. The pace of divestments has continued in FY16 as well. Combined with an improving business environment, market-friendly policies, and a pro-active government, 2016 should witness higher allocations to India. An added bonus would be if an enabling framework is put in place to strengthen the participation of domestic institutions as well. Indian fund managers would play a crucial part in sourcing, channelising, and over-sighting these local and global inflows.
Archana Hingorani, ceo & executive director, IL&FS Investment Managers