 "We should see equity raising of $15-20 bn in next 2-3 yrs: Bharat Banka")
Aditya Birla Private Equity is steadily making its way in a sector dominated by global biggies. Bharat Banka, the fund's managing director and chief executive officer, tells Dev Chatterjee the next barrier here for the sector to cross is the ability to raise meaningful commitments in domestic markets, which requires a removal of restrictions on participation by insurance companies, pension and provident funds, retirement funds, endowments and so forth. Edited excerpts:
Aditya Birla PE was an anchor investor in the recent Initial Public Offer (IPO) of Wonderla Holidays. What was the rationale behind investing in an amusement park?
We have maintained a positive outlook for plays on domestic consumption. The investment reflects an extension to consumer spending on leisure, entertainment and consumption. As it's already a scaled-up company, with good scope and visibility for further scalability, with sustainable margins, it's a unique play. Beside, it is the only company in this segment to be listed on the Indian stock exchanges as of date.
Valuations are a function of underlying performance of the specific portfolio company, market sentiment and general state of an economy. While exits through primary markets have been a challenge, not only in India but globally over the past two-three years, I expect this to change soon. I believe the Indian capital markets would see equity raising of $15-20 billion in the next two to three years by way of QIPs (qualified institutional placements), FPOs (follow-on public offers), IPOs and the preferential offer route. A significant portion would be from PE-funded companies.
Additionally, the strategic interest of global players would rise considerably and allow PE investors to get strategic or control premiums for their investments.
With the Indian economy slowing, what are the investment options for private equities like yours?
We have a decisive mandate at the centre of the Indian economy and while it would be unwise to expect huge changes overnight, the direction for revival of the economy is clearer. This clarity is already reflected in the public markets and is expected to be replicated in the PE sector. The choice would vary for each investor, with their focus areas and time horizons. We continue to remain sector-agnostic and selective in opportunities and expect more sectors and verticals to become investible.
Your recent investments across Cafe Coffee Day, Ratnakar Bank, Olive Bar, Wonderla Holidays, Treehouse Education, etc, suggest some kind of a trend.
As we continue to be guided by the disciplines of quality managements, sustainable business models & profitability and scalability of operations across our sector-agnostic theme, our portfolio companies reflect these tenets. The specific portfolio companies you named are broad plays on growth of domestic consumption, with the consumer sets being an ever-growing affluent middle-class and higher spending power with the younger demographics. This is manifested across education, hospitality, leisure and entertainment, beside technological edge in the BFSI (banking, financial services and insurance) segment.
Do you think Indian companies are becoming more comfortable with PEs and selecting firms based on valuation, referrals and sector expertise, and want help mostly with international expansion and customer access?
The PE sector in India has serious vintage of less than a decade. The number of PE-funded portfolio companies have started growing by leaps and bounds only in the past few years. As is natural, all the participants in this, be it the PE investor or the portfolio company, have gone through a learning curve in terms of mutual expectations and goals. I would say a higher proportion, if not 100 per cent, of PE-funded companies have found value in business referrals, sector expertise, global footprint, and systems and processes, although there would always be pull and push among participants. As for valuations, any deal only concludes with an alignment in this.
Do you think Indian PE companies and Indian target companies disagree most over the importance of corporate governance? And, that this is the most important item for PE firms, while of average concern to portfolio companies?
Rarely is there disagreement over grasping the importance of corporate governance between the PE investor and the funded company. The discussions revolve around the degree or level of expectations i.e. timing to introduce or upgrade certain systems and processes, its intensity, all at one go or gradual, etc, to make the funded company cope with the changes upon induction of a PE investor. Having said that, this analogy excludes companies which don't respect governance, which can be excruciating if it remains unidentified or masqueraded before the investment.
How is the alternate assets sector in India expected to evolve over the next few years?
We already have a meaningful presence and investment base of global PE funds in India, as well as home-grown Indian funds while raising commitments globally. On an average, the Indian market is witnessing investment of $8-9 billion annually, even in a muted environment. The next important paradigm for the sector to reach would be the ability to raise meaningful commitments in domestic markets. This will need more depth in terms of participants and will necessitate liberalising the participation by insurance companies, pension and provident funds, retirement funds, endowments, etc, as is the trend globally.
Besides, a more transparent and supportive tax regime would always be helpful. The contribution of the alternate assets industry in job creation and regional growth is already significant.
You are a board member of IVCA, the sector association. What's your view on changes in the segment and in regulations in the past one or two years?
The Securities and Exchange Board of India (Sebi) had come out with Alternate Investment Funds guidelines and continues to follow a consultative process with the alternate assets industry in a very positive and meaningful manner. As the industry association, IVCA has been able to represent and reason out with various regulators and organisations like Sebi, the Reserve Bank, the ministry of finance and the income tax department for more clarity on quite a few important issues for the sector. Examples are pass-through status for domestic funds, clarity around the General Anti-Avoidance Rules and its applicability, pricing guidelines for entry/exit of global PE funds, applicability of safety nets on exit by PE investors in an IPO, etc.
While it is a given that any sector never gets its entire wish-list, the important thing is an open and transparent dialogue and willingness to understand and resolve issues, which requires the confidence of regulators in the sector and sectoral associations. There is an alignment on that front.
Aditya Birla PE was an anchor investor in the recent Initial Public Offer (IPO) of Wonderla Holidays. What was the rationale behind investing in an amusement park?
We have maintained a positive outlook for plays on domestic consumption. The investment reflects an extension to consumer spending on leisure, entertainment and consumption. As it's already a scaled-up company, with good scope and visibility for further scalability, with sustainable margins, it's a unique play. Beside, it is the only company in this segment to be listed on the Indian stock exchanges as of date.
Also Read
Do you think exits by PEs are becoming tougher as valuations are not rising fast?
Valuations are a function of underlying performance of the specific portfolio company, market sentiment and general state of an economy. While exits through primary markets have been a challenge, not only in India but globally over the past two-three years, I expect this to change soon. I believe the Indian capital markets would see equity raising of $15-20 billion in the next two to three years by way of QIPs (qualified institutional placements), FPOs (follow-on public offers), IPOs and the preferential offer route. A significant portion would be from PE-funded companies.
Additionally, the strategic interest of global players would rise considerably and allow PE investors to get strategic or control premiums for their investments.
With the Indian economy slowing, what are the investment options for private equities like yours?
We have a decisive mandate at the centre of the Indian economy and while it would be unwise to expect huge changes overnight, the direction for revival of the economy is clearer. This clarity is already reflected in the public markets and is expected to be replicated in the PE sector. The choice would vary for each investor, with their focus areas and time horizons. We continue to remain sector-agnostic and selective in opportunities and expect more sectors and verticals to become investible.
Your recent investments across Cafe Coffee Day, Ratnakar Bank, Olive Bar, Wonderla Holidays, Treehouse Education, etc, suggest some kind of a trend.
As we continue to be guided by the disciplines of quality managements, sustainable business models & profitability and scalability of operations across our sector-agnostic theme, our portfolio companies reflect these tenets. The specific portfolio companies you named are broad plays on growth of domestic consumption, with the consumer sets being an ever-growing affluent middle-class and higher spending power with the younger demographics. This is manifested across education, hospitality, leisure and entertainment, beside technological edge in the BFSI (banking, financial services and insurance) segment.
Do you think Indian companies are becoming more comfortable with PEs and selecting firms based on valuation, referrals and sector expertise, and want help mostly with international expansion and customer access?
The PE sector in India has serious vintage of less than a decade. The number of PE-funded portfolio companies have started growing by leaps and bounds only in the past few years. As is natural, all the participants in this, be it the PE investor or the portfolio company, have gone through a learning curve in terms of mutual expectations and goals. I would say a higher proportion, if not 100 per cent, of PE-funded companies have found value in business referrals, sector expertise, global footprint, and systems and processes, although there would always be pull and push among participants. As for valuations, any deal only concludes with an alignment in this.
Do you think Indian PE companies and Indian target companies disagree most over the importance of corporate governance? And, that this is the most important item for PE firms, while of average concern to portfolio companies?
Rarely is there disagreement over grasping the importance of corporate governance between the PE investor and the funded company. The discussions revolve around the degree or level of expectations i.e. timing to introduce or upgrade certain systems and processes, its intensity, all at one go or gradual, etc, to make the funded company cope with the changes upon induction of a PE investor. Having said that, this analogy excludes companies which don't respect governance, which can be excruciating if it remains unidentified or masqueraded before the investment.
How is the alternate assets sector in India expected to evolve over the next few years?
We already have a meaningful presence and investment base of global PE funds in India, as well as home-grown Indian funds while raising commitments globally. On an average, the Indian market is witnessing investment of $8-9 billion annually, even in a muted environment. The next important paradigm for the sector to reach would be the ability to raise meaningful commitments in domestic markets. This will need more depth in terms of participants and will necessitate liberalising the participation by insurance companies, pension and provident funds, retirement funds, endowments, etc, as is the trend globally.
Besides, a more transparent and supportive tax regime would always be helpful. The contribution of the alternate assets industry in job creation and regional growth is already significant.
You are a board member of IVCA, the sector association. What's your view on changes in the segment and in regulations in the past one or two years?
The Securities and Exchange Board of India (Sebi) had come out with Alternate Investment Funds guidelines and continues to follow a consultative process with the alternate assets industry in a very positive and meaningful manner. As the industry association, IVCA has been able to represent and reason out with various regulators and organisations like Sebi, the Reserve Bank, the ministry of finance and the income tax department for more clarity on quite a few important issues for the sector. Examples are pass-through status for domestic funds, clarity around the General Anti-Avoidance Rules and its applicability, pricing guidelines for entry/exit of global PE funds, applicability of safety nets on exit by PE investors in an IPO, etc.
While it is a given that any sector never gets its entire wish-list, the important thing is an open and transparent dialogue and willingness to understand and resolve issues, which requires the confidence of regulators in the sector and sectoral associations. There is an alignment on that front.