 "Renuka Ramnath")
The rupee’s weakness and slowdown made it tough for private equity (PE) firms to exit investments in India. This may not change much in 2014 and PEs might have to look for exits through secondary sales or stay invested. But, six top fund managers tell Reghu Balakrishnan, a stable currency and a turn in investment cycle could put India back on their investors’ radar
Looking back at 2013
Currently, the sentiment is grim but we are positive about India's strong long-term growth potential. This year, we have remained extremely engaged with all our stakeholders and existing portfolio companies, continuing to look for operational improvement and consolidation opportunities. However, the macro-economic headwinds and currency devaluation have taken away the companies from achieving full potential.
Overcoming challenges
We have always tried to work with best-quality entrepreneurs and businesses, backed by good management teams. We believe in staying with them in the long run and aligning our objectives from the very start, to identify areas where we can add strategic value to the partnership - in terms of operational improvement, cost efficiency, market share growth and consolidation opportunities. We have also opportunistically used our NBFC (non-bank finance company) to provide more wholesome capital solutions to the companies we deal with.
Outlook for 2014
There are many pending exits in the sector as a whole, especially in the 2005-2007 vintage. The public markets are going to remain shallow. Therefore, PEs will have to explore alternate routes such as secondary exits, strategic sales and, in many cases, might have to stay longer than expected with the existing partners. I don't think the exit scenario is going to change in a hurry. So, we will have to be opportunistic and ready but, most important, make sure the entrepreneurs are aligned with our objectives.
Once the economic upturn kicks in, the reforms process starts and companies regain confidence in investing again, private capital, both debt and equity, will be a very important source for meeting the capital needs of this growth. In parallel, conglomerates will have to think hard about capital efficiency, resulting in a number of opportunities spanning carveouts, significant minority stakes and complete buyouts. I feel the next two years are going to be very active for private capital deployment. In addition, the stressed assets on banks' balance sheet have to move - in all of the above, private capital will have a lot to do.
LP's view on India
India is not really out of the global LPs' radar. What LPs are looking for are real returns in dollars and those have not been forthcoming in recent years. The way this will get corrected is economic growth coming back, the currency stabilising and for the Indian businessman to get confident to invest and grow again. India is a terrific long-term story, driven by very solid demographics. Once we have political stability, there is no doubt that the growth will return, primarily driven by supply-side dynamics.
Sanjay Nayar, CEO, KKR India
Looking back at 2013
It might appear that 2013 was a relatively boring and confusing year from an investing perspective. Currency deterioration, inflation, tight money supply, volatile capital markets, uncertain political climate, several high profile corporate debt restructuring, deteriorating fundamentals and poor corporate sentiment.
In hindsight, most decent vintage years appear difficult at first. Putting capital to work in unexciting and volatile times, provided you believe in the long-term fundamentals, has typically turned out to be a good strategy. Most people do the opposite, of investing in good times rather than tough times. Ironically, it appears 2013 was an exception! Statistics indicate a lot of money was invested this year; however, it wasn't widespread.
Overcoming challenges
2013 was a very poor year for exits and fund-raising. Again, it was a tale of extremes. There were companies which came to the market (secondary exits from existing GPs) which were well contested, as were the very few GPs which managed to get all the money they needed. The rest found it exceptionally difficult.
Outlook for 2014
In my view, 2014 will be the defining year for Indian PE. It will be a year of brave and many attempts. Several investments made in 2006-07 will be forced to come to the market in the form of secondary exits. Similarly, several of the India-focused funds will also come to the market to raise capital from global investors, including the better known names. With some stability on the economic front, certainty on the political side and slightly better capital markets, we could have better sentiment.
LPs' view on India
The global LPs' love affair with India is long over. Today, it is more about manager selection and investing with a credible GP, than merely allocating capital to the country. The PE segment is strange in that a Ferrari, Audi and Maruti all cost approximately the same. Almost all GPs have more or less similar fees and terms; yet, they all deliver very different value propositions and results. I think the LPs expect and will demand a lot more this time.
Sameer Sain, co-founder and managing partner, Everstone
Buyouts will remain a small segment: JM Trivedi
Looking back at 2013
In many ways, 2013 was more of the same for Indian PE. Given the disappointing growth in the economy in 2013, we have not seen any dramatic improvement in the value of new investment in PE. This is in spite of the fact that alternative sources of capital like the Initial Public Offer (IPO) market have dried and the cost of debt has remained high. The value of exits has improved but largely due to exits from PIPE (private investment in public equity) deals, with the stock market providing a window of opportunity to exit.
Overcoming challenges
The sector has tried hard to address the difficulties around exits. At a time when the IPO market, the preferred exit route for minority deals, has been shut, GPs have been busy selling investments to other PE funds in secondary deals.
Outlook for 2014
Secondary deals will continue to remain the major exit route in 2014. Buyouts are becoming more popular but will continue to remain a small segment of the market.
LPs' view on India
There are two main issues with Indian PE from the point of view of Lps - low returns and low realisations. The first has something to do with the froth in the PE market before the financial crisis, which resulted in high valuations. This is finally getting corrected, as the dry powder in the system has come down significantly and alternative sources of capital have dried up. Low realisation is a more complex issue. While it is not difficult to exit control deals in sectors such as consumer and health care, minority investors with limited exit rights are finding it harder to exit in a difficult external environment, plagued by slow economic growth, and an IPO market which is practically shut.
JM Trivedi, head, Actis South Asia
Looking back at 2013
Strong currency depreciation and extreme volatility eroded the underlying portfolio returns for PE investors and the opportunity to time exits. The new deal-making was affected by poor economic sentiment, driven by a slowing economy, worsening macro economic indicators, a battered investment cycle and heightened political uncertainty.
Overcoming challenges
Many global funds have vacated the Indian PE space. This has helped reduce competition for quality deals and will allow domestic firms to assume a much larger role, given their deep local insights and connectivity. Funds have started differentiating themselves through focused strategies (dedicated funds for different asset classes like credit, distressed, etc) and stronger capabilities.
Outlook for 2014
We believe the next three or four years would a great vintage to invest in India, provided PE firms can adapt and build suitable capabilities to benefit from the emerging environment. For example, given the slower growth scenario, we believe this vintage would be more fruitful for investors equipped to actively guide the strategy and operations of their portfolio companies and, hence, capture the alpha.
With respect to specific themes, we believe control transactions and carve-outs would become more popular in 2014, driven by an increasing desire of promoters to focus on fewer strategic businesses, succession issues and distress situations.
LP's view on India
For exits and returns, GPs need more focused strategies, a disciplined value approach, ability to generate liquidity and superior returns for investors across various economic cycles. While LPs aren't blindly pouring in money any more, they are still willing to invest behind GPs with differentiated strategies, strong capabilities and a great track record, as evident from strong India-focused fund raises in the past couple of years.
Manish Kejriwal, managing partner, Kedaara Capital
Looking back at 2013
The overall macro economic environment has not been very encouraging in recent times. This has also affected PE investments to some extent. However, I believe Indian PE is all about choosing micro winners that have the ability to succeed in times of volatility.
Overcoming challenges
I believe the Indian PE market provides a melange of opportunities, which requires that fund managers remain flexible in their approach towards investing. Over the past year, I have seen this flexibility play out in the Indian marketplace, with funds investing across stages and sectors, listed and unlisted opportunities. At the same time, maintaining valuation discipline, a constant focus on exits and ensuring alignment with the entrepreneur have become even more pertinent to investment decisions in the current context.
Outlook for 2014
Indian PE will continue to be driven by growth equity stories, with a focus on consumption-led business models. PE to PE deals have been a key theme in Indian private equity in the past year and I believe these opportunities will continue into 2014 as well. Another theme that has emerged is of shareholder re-alignment.
LP's view on India
There are three ingredients to successful investing in India - careful selection, based on conviction in the entrepreneur, and opportunity; finding a solution beyond just providing capital; and, mutual selection between the entrepreneur and the fund.
I personally believe global LPs continue to be optimistic about the long-term potential of India. Indian fund managers need a clear view of the exit timing and route at the time of investing into the company and ensure alignment with the entrepreneur even before the investment.
Renuka Ramnath, MD & CEO of Multiples Alternate
Looking back at 2013
2013 has been a very good year for Sequoia Capital in India. We continued with our approach of investing in high quality consumer, technology and health care companies. The continuous challenge in our business is to find high quality companies and entrepreneurs to partner.
Overcoming challenges
Finding high quality opportunities requires being focused on a few select sectors and being prepared to decide quickly when the opportunity presents itself. Over the years, we have continued to sharpen our focus on select sectors (technology, consumer and health care), which helps us be better prepared for the opportunity. We have invested heavily in people and networks to ensure we have the capabilities required that entrepreneurs find helpful in building their business and think of us as credible partners in their journey.
Outlook for 2014
We believe we will see the following three trends - Greater focus on more capital-efficient consumer and health care businesses, more of technology investing and more early-stage investing.
LPs' view on India
India is a very large market and all stakeholders will continue to watch it carefully. The bar on expected performance is high and the onus is on all of us to deliver better performance, to ensure the India promise and potential is realised.
Abhay Pandey, managing director, Sequoia Capital
