Standard Chartered Private Equity (SCPE) has been an active investor in India since 2005. It has invested about $1 billion in India across sectors. Co-global Chief Executive Officer Nainesh Jaisingh speaks to Reghu Balakrishnan about the growth of Indian PE space in the past seven years. Edited excerpts:
How do you see India’s growth as an investment destination?
SCPE has invested about $1 billion in India. Of this, $370 million was invested in 2011. In terms of outlook, the country’s macro challenges are well documented, and will result in foreign investment slowing. The nature of the response to this slowdown will determine the size and growth of the investment opportunity over the next few years. Despite the above, the intrinsic growth in the domestic consumption story, the crying need for infrastructure and the dynamism of Indian entrepreneurs remain strong attractions for long-term investors.
Today, most GPs (fund managers) are struggling to get out of their loss-making investments...
Like a number of other emerging markets, India, too, went through a gold rush phase, when the PE universe discovered India (2006-07). With this, came the attendant ills of oversupply of money, shortage of seasoned fund managers, and high-entry valuations. PE investing was about placing bets on exciting young companies that could sustain extraordinary growth rates and, therefore, high valuations even at the time of exits or momentum investing, in short. Clearly, this is not the PE proposition, and it is evident now that it is not sustainable through the inevitable economic cycles.
So, what’s the solution?
A credible business model for PE needs to revolve around the investor — either by helping a company to move into the next league or by fixing a financial or operating problem or by funding and backing an inorganic strategy. Simult-aneously, a clear understanding between investor and entrepreneur regarding exit horizons is an absolute must, to avoid discord and conflicts of interest.
What actions do GPs need to initiate?
Execution of such a business model requires a skilled and experienced team, which has seen the cycles. But most importantly, it requires the ability to engage effectively with Indian businessmen to gain their trust and cooperation. Being a PE investor does not entitle us to returns, but genuine value creation and problem solving for businesses do. A class of promoters in India values this, and is more than willing to enable such investors to make good returns.
What changes do you notice in promoters’ attitude?
Indian promoters have begun to appreciate the PE proposition much better over the last few years. They have also begun to differentiate between different categories of PE funds, and are in a position to decide who they want as partners, keeping aside the valuation issue. Events of the last few years have underlined the importance of compatibility between inve-stors and promoters, both in terms of achievement of a business plan and exit agenda for the investor.
As a global PE firm, how do you differentiate India from other emerging Asian markets?
Loss of confidence and enthusiasm among the Indian business community is certainly a cause for worry. Add to this the macroeconomic challenges, including the currency and governance issues, investing in India becomes a difficult proposition.
Other markets in Asia certainly have fewer problems to deal with at the moment and, hence, doing business and closing deals are certainly easier. Having said that, a bottom-up approach to investing in Indian companies is likely to provide better opportunities, due to the negative sentiment overall.
How do you evaluate the government’s recent PE regulations?
The clarity on tax issues is certainly helpful and the certainty is what people look for. However, it is important that there are no more twists and turns. PE is India’s most promising source of foreign direct investment and should be encouraged.
How supportive are other Asian governments?
PE is welcomed and reviled in turn in most countries, depending on the country’s economic situation and political context. Even the developed world goes through these cycles. The ease of doing business and certainty on the regulatory front are the two big factors India needs to fix. China and Southeast Asia have done a great job on these fronts.
What’s the rationale behind your mezzanine fund in India?
It is an addition to our PE business. We see a number of businesses where promoters are not willing to dilute their shareholdings due to market conditions and low valuations, but yet need financing to complete projects or fix their capital structures. Mezzanine solutions are increasingly being used to bridge the risk or return gap for both investors and promoters. However, a number of mezzanine structures that work globally are not easy to implement in India due to regulatory complexity.
SCPE exited Endurance successfully through a secondary deal. But exiting Powerica through on initial public offering (IPO) is yet to happen. So, how significant is it to exit through secondary deal in India?
The market for secondary PE deals is pretty well developed in many markets, and is increasingly getting traction in Asia too. The sustained downturn in the public mar-kets/IPOs is a major reason for this. We will continue to be open to all avenues, as long as they meet our and promoters’ requirements.
SCPE has not made investment in the last seven months. Are you in a wait-and-watch mode or is it a deliberate decision of not being aggressive?
Our activity levels are pretty good on all fronts, and we have some irons in the fire.