Co-investment - many private equity (PE) funds coming together to invest in a company - is fast emerging as a strategy in India, especially in the $25-100-million-deal range.
According to Venture Intelligence Data, multiple PE funds came together and invested $371 million during January-May 2013, compared with $322.53 million during the corresponding period last year, an increase of 15 per cent. Interestingly, the number of investments by sole investors in the $25-100 million category dropped to $310 million from $1,190.2 million, a steep fall of 74 per cent.
While co-investment is catching up in India, it has been the trend abroad for many years. According to experts, co-investment benefits both the funds and the company. It works well for institutional investors not willing to put all their eggs in one basket.
Amit Chander, partner at Baring Private Equity Partners India, says this is part of PE funds' de-risking and diversification strategy. It is like a consortium of banks coming together to lend, in order to spread the risk, says a senior official from another PE fund.
According to Chander, BFSI (banking, finance services and insurance) is a key sector that attracts co-investment. One reason why PE players prefer co-investment in this sector is because the rules don't allow a single investor to hold more than five per cent equity in a bank.
It may be noted that in 2012, Baring India, Sequoia Capital and Siguler Guff had acquired a four per cent stake in Kerala-based gold loan retailer Manappuram Finance for $26 million (Rs 130 crore). Unlike in the past when funds preferred to have the exclusive tag with a company, the preference now is to club together. One of the main reasons behind the new approach is "volatile stock markets", which has impacted valuations of many companies. Funds that had earlier invested at high valuation are not too keen to increase their exposure in the changed environment.
One of the bankers involved in PE transactions says as the complexity in investments is increasing in sectors such as e-commerce, PE players are open to joining with other funds with specialisation in a particular sector. Besides, these days, funds are finding it difficult to raise money, not the case earlier, say between 2004 and 2007, when funds specifically for the Indian markets was launched. Now due to slowdown, funds raise money from the investors globally and they send a portion of it to India.
Chander also notes marquee funds, not having a presence in India, would adopt co-investment route.
Credibility booster
From the company's perspective, it is much easier to raise the next round of funding if more than one fund has invested in it. This is because PE funds do due diligence very thoroughly as they check even the minutest of details before investing in a company. Therefore, if more than one PE fund has invested in a company, it increase the firm's credibility. Besides, the PE funds' networks are roped in for the growth of the company.
Having multiple investors would also help the firm as and when it decides to hit the capital market, says the executive of a company that raised $100 million from mulitple investors.
K R Bijimon, chief general manager of Muthoot Finance Ltd, says if it's a single PE player making a significant investment, then it would be looking for a position on the board. On the other hand, if the same investment is made by several PE firms, no investor will have a major share to claim a directorship on the board. Therefore, the investee firm will have more power if the PEs are coming as co-investors.
For a comparatively smaller company, the investor would be more stringent and would look for a directorship as the risk is higher. However, the PE investors brings in expertise into the investee firms, which would help them make a better growth.
However, the expertise that PEs bring into the investee would also be less in a co-investing situation.
In Muthoot, there were four investors including Matrix Partners, Barings Private Equity India, Kotak Private Equity and the Welcome Trust, which together acquired 7 per cent for around Rs 500 crore three years ago.
Co-investment is becoming popular with investors looking to increase returns by paying less in management fees. According to one fund manager, 2 per cent is the management fee for a Rs 300 crore fund.
However, co-investing can be challenging for PE funds. The administrative load will be high as it needs to deal with the investee company as well as other funds. The most important challenge that need to be addressed in the beginning of the investment is exit strategy. If the funds agree on the exit strategy, it will be smooth. However, if divergence happens, then there will be issues for funds, says Chander.
NEW ON THE BLOCK
- Co-investment is many private equity funds coming together to invest in a company
- Multiple PE funds invested $371 mn during January-May against $322.53 during the corresponding period of last year
- Co-investment benefits both the funds and the company
- It works well for institutional investors not willing to put all their eggs in one basket
- It is like a consortium of banks coming together to lend, in order to spread the risk
