Ajay Relan, a heavyweight of the Indian private equity (PE) industry, headed Citigroup’s India PE business since its inception in 1995. He quit Citi Venture Capital International (CVCI) in 2008 and floated CX Partners. Within a year, he raised more than $500 million in bad market conditions. He speaks to Reghu Balakrishnan on how the Indian PE sector can bring back its lost sheen. Edited excerpts:
How challenging was fund-raising?
The process was, of course, challenging in 2008, but limited partners (LPs or investors) thought India and China would outperform as the West deleveraged and got its house in order. For the most part, Chinese public markets and Indian private markets have disappointed LPs in the last few years. The current fund-raising situation is more challenging and requires real differentiation of strategy and proven results before LPs will consider making a commitment. Realised proceeds will define fund-raising success.
At present, Indian PE industry is out of LPs’ radar. What are the main issues?
Main issues include lack of differentiation in strategy among GPs (general partners of fund managers), inability to articulate how they truly add value to portfolio companies, lack of ability to monetise investments in a timely fashion and lack of experience among many first time teams and funds. GPs will have to separate themselves by their ability to deliver meaningful alpha through all of the above. There will be consolidation in the GP market as well.
Are regulatory hurdles hitting hard on the PE industry in India?
I think new finance minister (P Chidambaram) has helped tremendously here and markets are far more sanguine about the underlying regime. Focus has shifted to macro. If the government makes reasonable effort at fixing fiscal deficit, focus will shift to micro issues and capital will start flowing to compelling opportunities.
PE deals are in the $20-30-mn range. What will be the trend in 2013?
Deal sizes will get larger over time as capital markets stay closed and more mature companies solve their capital needs through private sources. Capital markets will open for brief periods and then close as the world oscillates between risk-on and risk-off, depending on whether the central bank easing or fear of deleveraging dominates investor mood. More Indian businesses will sell strategically as global growth slows. There will be a consolidation from 2013 end and most of 2014 to reflect money raised in 2006 and 2007.
What’s the significance of CX Partner’s news special situation fund?
A lot of Indian businesses have return on capital of less than 20 per cent. For the most part, they do not make good candidates for PE investment. They may, however, at certain times, make good candidates for financing with a fixed return. This represents a large opportunity that is largely catered to by a few NBFCs (non-banking finance companies) and proprietary trading desks inside banks. Given that banks are cutting back on proprietary positioning, we believe there is a significant imbalance between demand and supply of capital here.
CX Partner’s interest over PIPE (private investment in public equity) transactions?
With the right management team, industry, rights, liquidity and valuation, we are not opposed to PIPEs. Of course, we recognise that public companies do not make for an easy exit through the trade sale route and that does make them less attractive than private companies.