'India provides exciting times for private equity play'

The Indian private equity domain is witnessing exciting action with domestic fund managers joining the fray to manage a larger share of the private equity fund being invested here. The larger chunk is being managed by foreign fund managers as of now, but all that is about to change, says Raja Kumar, managing director and chief executive officer of UTI Venture Funds, in an exclusive interview with Business Standard. Excerpts:

How do you see the market for private equity developing in India? Who are going to be the big players?

Private equity and venture capital investments grew at about 68 per cent in 2004 from $774 million in 2003 to $1.3 billion. In the current year (2005), we expect private equity investments to go up to $2-2.5 billion, nearly a 100 per cent growth.

In the last 10 years, about $7.5 billion has been invested in India through this route. We expect another $10-$15 billion investments in the next five years. I have never seen a more congenial climate for domestic firms to raise capital.

Everything conducive to private equity is falling in place: strong and credible markets and regulatory infrastructure, large private equity investments as well as successful exits have created a huge level of comfort for large private equity funds targeting India.

A strong demand for private equity investments comes on the back of negligible capital expenditure by Indian corporates in the last few years. Across the whole spectrum of industry, several companies have been reporting excellent results.

They are now witnessing strong local and global demand and thus are in dire need of growth capital. The newer generation of entrepreneurs is also open to sharing ownership with private equity firms in their quest for gaining market leadership.

The market players for private equity investments exceeding $20 million in deal size are primarily large global private equity and buyout funds which focus on investing in listed markets through pipe deals.

For investments in the smaller deal segment, there are pure play private equity firms such as UTI Venture Funds and some hedge funds which are looking to invest in the exciting opportunities.

The domestic stock markets have a market capitalisation of over $375 billion and a large unlisted segment can easily absorb $10-15 billion private equity capital over the next five years.

Each fund has its own strength and niche area of operations - we at UTI VF focus on the mid-market segment. Clearly in this vibrant market, there is enough room for serious and capable private equity players.

Are there enough good companies to provide for diversification (investment) opportunities? Which sectors will see the maximum activity?

The Indian economy is on the growth path and necessarily this will throw up several opportunities for capital investments. There are several companies which over the next few years will scale up to $100 million- plus (Rs 440 crore) market cap.

We feel the investment demand will come from all sectors riding the outsourcing wave such as IT/ convergence, BPO in services outsourcing and auto/ auto ancillary companies, textiles, pharmaceuticals in manufacturing outsourcing business. Apart from this, infrastructure, real estate, construction and related services would be another hot spot.

Do Indian fund managers have the expertise to spot growth companies? Will they be able to attract foreign investors to invest with them? What kind of Indian institutional participation do you foresee?

Indian private equity fund managers have strong local knowledge and experience in making growth investments in the domestic markets. They have over the past few years also been providing attractive returns to their investors, and this will attract more institutional investors to this asset class.

Foreign investors are already investing in the Indian markets and this trend will continue. Also institutions such as banks and insurance companies have started taking exposure to domestic funds, such as UTI Venture Funds, in order to gain exposure to this attractive asset class. With encouraging performances of funds and increasing familiarity, the role of domestic funds is all set to grow.

How do you see the India private equity story panning out: what are the positives and negatives?

Let's start with the positives: there is a strong India growth story there. There is a huge appetite for growth capital resulting from inadequate capital expenditure in previous years and strong global demand scenario for several industries.

Promoters appreciate the role of private equity funds and are open to share ownership. Market conditions are conducive for investments and exits as exemplified by several deals/ exits in last 1-2 years.

Finally, sufficiently experienced private equity fund managers, a growing awareness and satisfactory experience of domestic institutions and banks with private equity industry is leading to their increasing participation.

As far as concerns go, there is undeniably a rapid growth in risks such as the entry of inexperienced players, multiple fund raisings by the same managers, the fact that financial intermediaries are encouraging promoters to play the valuation game by bidding up based on secondary market considerations and not so experienced fund investors wanting to come in without understanding the risks concerned.

How do private equity funds contribute to the economy?

It is proven that globally venture capital and private equity investments have contributed to strong economic growth, increased efficiencies, helped in the creation of new jobs and in the progress of technology. It is also proven that private equity-backed companies typically out-perform their peers and thus help build market leadership in the economy.

Also private equity-backed companies are viewed with more comfort and respect. This is because private equity funds add significant value to their investee companies in terms of providing strategic direction, addressing inefficiencies and improved corporate governance.

Thus private equity funds contribute to the economy by providing scarce growth capital, encouraging entrepreneurship, accelerating industrial activity as well as in improving quality of the corporates.