Bharat Banka, MD & CEO, Aditya Birla Private Equity, has just raised money for a new fund. In an interview with Arijit Barman, he says providing capital to companies which may be facing market dislocation could be an interesting opportunity. Edited excerpts:
How are the slowdown and poor sentiment impacting investment ?
Some emerging economies, like India, will continue to outperform Western economies for a long period. But the investment cycle in India is more related to domestic factors, being an inward looking economy. For a huge rebound in the investment cycle, we will need a lot more serious push on policies and reforms.
Is this a good opportunity to fire or is preserving capital a better bet?
Corporate India seems to be a bipolar world. At one end, there are companies with strong businesses, which may have seen contraction of margins and muted growth in the last couple of years but are still cash-accretive. These companies are preserving capital and are more judicious in capital allocation. On the other end, there are emerging companies, which are facing stagnation or slower growth, high input prices, longer working capital cycles and high interest rates. Here, the need for capital is at the maximum, despite attempting to conserve net cash accruals. As for private equity (PE) investors, it could be an interesting opportunity to provide capital to companies that may be facing market dislocation but are inherently strong and follow acceptable governance standards. So long as the outlook for the next five years is encouraging, the vintage of the next one-two years could be an attractive timeframe to deploy capital for PE investors.
You have raised a second Sunrise Fund in this environment. What were the challenges in raising money from investors at this time?
Our second Sunrise Fund has been a well thought-out theme for us before we ventured into raising capital. We have followed a strategy of extensively engaging with our existing and potential investors and channel partners to design fund features that our investors would wish to take an exposure to. It has been possible due to our unique capabilities to handle multiple investment themes and strategies with equal expertise. This approach reduces the challenges prevailing in the industry. It is a fact that the rigour at the end of limited partner (LP) investors while choosing general partners (GPs) has increased and that is now manifesting in conditions like the need for a differentiated approach and alignment of GPs with interests of LPs on running costs, etc. But the expectations on internal rate of returns are more in line with reality.
What is your investment thesis? Is it better to spread risk through a series of smaller investments?
Our investment philosophy has been to build a portfolio of assets with desirable levels of diversification on risks and returns. So, Fund-I has a mix of businesses in manufacturing and services which cater to different segments of the economy, balancing out risks in terms of business trajectories. The businesses that we find interesting and strong, we would want to own as much as possible. But eventually, it is also a function of the fund needs of a portfolio company and the acceptable dilution levels for its founders.
Secondary sales are picking up among funds. Will this trend intensify? Why?
In the private equity space, funds are governed on the timelines by their charters, necessitating an exit even from the most lucrative investments to be able to return capital to the investors. Many PE funds launched in 2005-2007 to invest in India are now up close to their maturity cycles. Hence, the trend of exits will definitely increase, but whether it would be more secondary sales to other PE funds or sale in public markets is more a function of where the window of opportunity would be.
What about exit routes? CARE is going for an IPO. But is this the right time?
In the current situation, the exit route of buybacks by the companies or the promoters is somewhat less likely, as there’s a need to conserve capital. Hence, exit routes of strategic sales, secondary sales to other PE funds and that of public markets are more likely. One of our portfolio companies, CARE, has filed a draft red herring prospectus to launch an IPO but the interesting fact is that the company has strong cash accruals and doesn't need to raise capital. But it is providing an opportunity to its shareholders to monetise their investments and take an exit in full or in part. I firmly believe there is never a right or a wrong time to enter the capital markets. The decision to float an IPO should always be driven by the needs of the company and its shareholders.
How are you evaluating the retailing industry? Can you delink the policy issues from investment in this sector?
The consumption theme in India is strong and retailing is an integral part of that. There is a potential to build serious scale in some retail segments and yet remain insulated from policies. The key is in picking up the right segments.