The Indian arm of UK-based private equity (PE) company Actis aims to take the highest share of the $2.9-billion global fund. The fund allocation by the PE firm is different from its peers. While Actis India has a fund size of $500 million, each investment it makes will be matched by the global pool. As J M Trivedi, partner (head), Actis South Asia, said, “If we invest faster than other region partners, our fund size can go up to $1.2 billion. But if others are fast to invest, we might get around $800 million.” In a conversation with Shivani Shinde and Abhineet Kumar, Trivedi talks about the rebound in the PE market, what ails the India buyout sector and the way ahead. Edited excerpts:
How does fund allocation work at Actis?
We have a $2.9-billion global PE fund, from which we are investing in China, Africa, Brazil, India and South-East Asia. We have a central pool and we have side pools. India has a side pool of $500 million, and every deal done here will be matched by the global pool. So, the minimum India fund is $500 million and the global pool will match the investment done in India. If other regions — China, Brazil, Africa and South East Asia — invest faster than us, we will get around $800 million. But, if we are faster, we can take the India pool up to $1billion, or even $1.2 billion.
We have been in India for some time now. From our first fund, we invested a couple of million dollars between 1996 and 2003. The second fund of $450 million is fully invested. We have invested about 15 per cent from our third and existing fund. We plan to exhaust it in the next two-three years. Apart from this, we have a $750-million infrastructure fund.
This year has seen a comeback of PE investments. Are the valuation mismatches of last year a thing of the past?
PE investments are back due to the turnaround in the economy. Except for distressed companies, no one was ready to raise capital during the downturn. But, India has come out of this crisis unscathed. PE players have realised that in the next three-five years, India will see 8 per cent growth.
That is why in the last quarter of 2009 and in the first quarter of 2010, we have seen a huge build-up in the pipeline and an equivalent increase in deal-making. Though, it takes three-six months for deal closures.
Second, a lot of money was raised for India before the meltdown, but not invested. In fact, very little got invested. So, when the demand for capital returned, the existing supply helped PE investments come back.
But, what about valuations?
There is always a valuation gap. In normal times, parties will come to a conclusion. But, what happened in 2008 was that promoters were not willing to dilute at all, as they did not need cash, while PE players, sitting at the other end, were cautions. So, there was no convergence. Things have changed now.
What is your view on capital raising? Are limited partners (LPs) still cautious?
Yes, they are cautious. But I see a lot of appetite for investing in India. In case of LPs, if they want to allocate a certain per cent to PE, India and China are the only two main markets. The US is yet to recover fully, while Europe has its own set of problems.
So, in terms of investment, there is no doubt about India. But, concern arises on the issue of returns. This is an area where other than growth, valuations also matter. And, this is where they are cautious. Because, valuations in other markets are still low.
What is also happening is that LPs are being cautious in respect to general partners (GPs). Going ahead, they will rely on GPs who have a track record, a situation unlike 2007, when GPs without any track record were able to raise funds.
Stock markets have revived in India. Isn’t it a good time for PE firms to exit investments?
Exit by PE firms depends on earning growth in three-four years. In 2008-09, earnings dropped sharply. The last two quarters of 2009-10 were a washout. Most of the companies would have seen a contraction in businesses (drop in Ebidta). And, looking at growth charts, firms might be at the same earning levels that they were in 2008. As a PE firm, if you are getting two times the Ebidta and a good multiple, you would want to sell. But, if I see that in the next one year, the company can give 20-30 per cent returns, why should I sell? While internal rates of return are important, the multiple of investment is also crucial.
I think PE funds will be patient for another year as they see good growth and that will give them a good multiple.
Though Actis has been active in buyouts, there are few opportunities in India for this...
India is a growth market and if everything is growing, why would promoters want to sell? Hence, buyouts are just about 10 per cent of the total PE investment in India. However, India has a large number of family-owned businesses and many of them are run by second and third generations, who might not be interested in running them. It is more of an issue of succession. If you look at some of the buyouts we have done, they were due to succession issues. We like buyouts, as our style of investment is active investment. And, we believe that if you have a controlling stake, then only you can get these changes.
For instance, Paras Pharmaceuticals was growing 12-15 per cent year on year before we took over. We got a CEO and other professionals, we made operational changes and today Paras is growing 30-40 per cent year on year.
But there can always be discontent among promoters in buyouts, as happened with the investment by Actis in Nilgiri Dairy Farm.
I would not like to make any detailed comment on this but we are working towards an amicable solution.
Which sectors do you think are attractive for buyout?
We are a sector-focused fund and so we will look at consumer and retail, financial services, industrials and services like outsourcing and logistics. There are buyout opportunities in all these sectors. But, they have to be due to succession issues. Hence, there will be less opportunity in the outsourcing industry and financial sector as they are not family-owned.
Are you planning to exit Paras?
Let me clear this once and for all, we are not selling Paras.
