)
A challenging and uncertain macroeconomic environment has left the global private equity market flat and directionless in the past couple of years. The scene is not too different in India. A report by Bain & Company estimates that private equity deal activity in India fell to $10.2 billion in 2012 from $14.8 billion a year earlier. According to Nainesh Jaisingh, global co-head for private equity at Standard Chartered Bank, the experience on returns and exits in India has been disappointing for investors. In an interview with Somasroy Chakraborty last week, Jaisingh said an extended downturn will test the patience of even long-term investors. Excerpts:
Private equity deals in India in the past few years have reflected the overall mood of caution in the market. Do you expect this sentiment to persist?
The private equity space in India has moved away from being a broader play on the macro story, to a more bottom-up, sector-specific set of opportunities. Allocations to India are coming down and I do not see this changing, unless the political environment improves and sentiment is restored. If the negative environment persists, India may go back to being a market for opportunistic investments, rather than a broader asset class by itself.
More From This Section
Is India losing its attraction as an investment destination for private equity players?
The experience on returns and exits in India has been generally disappointing for most investors. There are only a small handful of private equity houses that have made money at a fund level over the past five or six years. Other investment destinations like south-east Asia and China have had a much more stable environment for investors. Long-term investors will still see this time as an opportunity to invest in India at attractive valuations, but an extended downturn will test their patience as well.
Indian promoters are not keen to dilute or sell equity when the sentiment is negative and valuations (at least in mid-size companies) are lower. Once the business cycle revives, the need for primary capital will also be restored - leading to bigger and more prolific deal flow.
Which sectors look attractive from a valuation and opportunity point of view?
Depending on how you see the cycle, rate-sensitive sectors such as financial services, real estate and automobile-related stories should do well if the government is successful in taming inflation. Existing infrastructure assets that are operating well but have over-leveraged sponsors who could also be an interesting area of opportunity. The rural consumption theme, too, seems to have good medium- to long-term prospects.
It appears debt transactions are gaining popularity in India. Are companies preferring to raise debt over equity in this environment?
It is a function of the stage of the economic cycle. There is a natural reluctance to sell or dilute equity on the part of the promoters. Mezzanine or quasi-equity instruments are thus good solutions. Flexibility is an important factor for success in investing in India, so I am not surprised that seasoned houses are using these avenues to deploy capital.
Standard Chartered Private Equity has been very active in the mezzanine space in India over the past three years.
Is there scope for revival of private equity investments in the Indian micro finance sector?
Microfinance is a very difficult business model to implement successfully in India. Unless the model is tweaked to meet the unique issues in India , I do not see private equity interest in this sector coming back.
How has Standard Chartered Bank grown its private equity business in India? What are your plans for future investments here?
Standard Chartered has an unparalleled franchise of clients in India and, hence, we have privileged dialogue with a large number of business houses. We intend to continue to provide principal finance solutions for their needs for the medium term. Our investment record here has been good, and we have grown our asset book in tandem with our clients' own businesses. We will be selective in the sectors we pick but more important, will ensure we back the right people.
Our portfolio in India has spanned a variety of sectors and we have had a consistent track record of successful exits. Underlying this is our ability to partner well with our clients to build medium- to long-term value.
