The global financial turmoil has taken a toll on private equity (PE) investment in India, which fell over 40 per cent on during 2008. Though fund managers see lower valuations as an opportunity to invest in companies, there have been few investment announcements during the last three months. Rajeev Gupta, managing director and head of India Buyout team at Carlyle Group tells Abhineet Kumar that more companies are seeking PE investment but the regulations are hindering more fund flows.
Are the promoters expectations still high or funds are drying up since the PE investments are slowing down?
In recent months, a lot of companies have come to us. They want to see long term shareholders. During the bull market, portfolio investors pumped in a lot of money into companies. This lent instability to their stocks and the expectations of promoters changed. But now they are looking for investors who lend stability to their stocks. This represents a major change in their expectations.
Then, what is stopping the firms from getting investment?
Basically, there are two ways in which capital can be raised. One is from investors who can participate through what Sebi has labelled as QIPs (qualified institutional placement). Second is through preferential allotment to PE firms and some of the largest players are present in India. Regulations are quite benign for QIP issues to portfolio investors. The six-month price floor rule does not apply to QIP allotments. However, this rule does apply to preferential allotment to PE firms.
Why can’t PE firms participate through QIPs?
In QIPs, no one investor can have more than a 50 per cent of the shares offered by a company. And, there should be at least five investors. We put a lot of energy to understand the company and its business. We want a significant ownership in the company. Therefore, in the last three months the PE flow has been very small. And, during the current three months, it will remain small.
So, what is the possible way out?
What we are suggesting is for the rule of two weeks’ average price being applicable, as opposed to six months’, there should be two categories. One category should be promoters and those acting in concert with the promoters. If a promoter wants to take an allotment to a company, or a person acting in concert with the promoter wants to take an allotment in concert with the company, then this six months’ rule should be applied.
All those who are non promoter entities are financial buyers. I am not a strategic buyer. I buy it for a certain horizon, after that I quit the stock. When an allotment is made to PE funds then this six months’ rule should not be applicable.
But why can’t companies raise capital through QIPs alone?
Today, five portfolio investors simply may not be there to participate in QIPs. The portfolio investors are those who participate in every asset class. They were doing equity, bond, commodity, currency, derivatives and did not have one asset specialisation.
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This is affecting their performance. The class of capital that still has money in India is PE funds. But regulations do not support PE investment.
Why can’t PE firms come together and participate in QIPs?
Considering the amount of effort we are taking to understand a company, there is no way two PE firms will come together. A big difference between us and the portfolio investors is that they buy and sell without having a long investment horizon.
Do you think the two weeks rule for PEs would be enough to attract investment?
At the current low share prices, the companies can extract higher value by bundling of equity with long-dated warrants. In India, regulations require that warrants should not have life time of more than 18 months. Now, a life of 18 months means that companies cannot extract maximum value of their own equity.
You should not have the six months rule for PE funds and allow long-dated warrants. Recent regulations permit long-dated warrants but only if they are bundled with the non convertible debentures.
That is about the listed companies, why are funds not flowing into unlisted companies?
Growth capital funds are normally about 10 per cent of the overall portfolio of large international PE firms. About 90 per cent is called large investment funds. It’s not growth capital. Large investments in private companies are exceptional. Companies in India go public early to attract better employees and respectability.
They go to the public and then come to PEs for long-term capital. Today, portfolio investors are short of limited partners’ confidence.
Why do companies need PE investment?
Everyone wants liquidity so they want 5-10 per cent trading shareholders. They do not want to have 60 per cent trading shareholders. They want PE to provide capital to the company, but in the last few months we have done nothing and for another three months, we will do nothing. So while India is stuck in its regulations – the capital is flowing into China, South East Asia, Australia.