In its first investment in India, Morgan Stanley Private Equity (MSPE) has invested Rs 182 crore for a “significant minority stake” in Biotor Industries, an integrated manufacturer of castor oil and castor derivatives in the world. Last year, MSPE Asia had raised a $ 1.5 billion dedicated fund for Asia and a “significant” amount of the fund will be allocated to India over the next two years. Priya Nadkarni and Shivani Shinde caught up with Morgan Stanley Managing Director Srinivasa Rao Aluri to talk about the private equity unit’s strategy in India. Excerpts:
Why have you chosen to invest in the agriculture sector in your very first deal in the country?
There are two or three things going for Biotor. First, it is in the agri sector, we have been looking at this sector for quite some time and also because of what it can provide in terms of returns. Though the concept of chemurgy (branch of applied chemistry that is concerned with preparing industrial products from agricultural raw materials) has been around since early 20th century, it is now making a comeback.
India grows over 75 per cent of castor seeds, but traditionally has just been crushing and selling it as oil. The value-addition traditionally happened in Europe and the US. We will help the company directly sell to customers in Europe, US and China.
Having said this, let me also add we are not a sector-focused fund. We will not look at the real-estate and infrastructure sector as we have dedicated funds for these sectors.
What would be your typical deal size?
Typically, in India, there would be growth deals of anywhere between $20 million and $200 million. That is our ‘sweet spot’, as well. We will look at both buyouts and growth deals based on our experience in other Asian markets. In terms of investment in the type of companies, we would prefer unlisted companies as it is easier to bring about changes there compared to listed companies.
Has Morgan Stanley been slow in doing deals or is it just the environment?
We have looked at a lot of deals, we have gone ahead and met a number of entrepreneurs and companies, to understand what value-addition we can bring with expertise. The deal pipeline remains robust. Moreover, when we started in May, we had to start from building a team, which took some time. We have a six-member team.
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The recent Satyam-Maytas controversy has once again brought back focus on corporate governance. Does having a PE on board help in avoiding such a scenario?
It depends on each PE. Overall you would tend to believe that a PE-invested company would have a higher level of corporate governance. Corporate governance is something we push for in every company that we walk into. Both the companies and the PE should believe that it is a value- enhancing move.
What are some of the main challenges that PEs are facing now?
One major impediment is valuation. Because of the steep fall in valuations among listed firms and the multiples they trade at, valuations of unlisted firms have also corrected but there remains always a dichotomy in terms of how you value something. A promoter might not want to raise money at all because of the dilution. So there will always be a gap that needs to be bridged. Normally, in a good market, the gap is wider because expectations are very high.
The other challenge is regulatory issues, especially in sectors such as education and healthcare, which are still in an evolutionary stage. Besides, in some sectors, there are several small players , but no serious player, with size, where we can invest. In such cases, we will look at a roll-up strategy. We will invest in a big player which will then acquire smaller players in that space.
