PE funds may rethink India strategy: Experts

The collapse of discount retailer Subhiksha, coupled with the economic downturn and the fear psychosis created by the Satyam scam, is leading private equity (PE) investors to rethink their strategies in India, especially in firms with significant promoter control, experts say.

“The Subhiksha incident will make PE firms more cautious on how much of a free hand they allow to a promoter. Some PE funds are concerned that promoters have a wide range of authority in their companies and could look to establish structures that limit some of this authority,” said Vikram Uttamsingh, head, private equity advisory group, KPMG.

Jagannadham Thunuguntla, equity head, SMC Capitals, said success and failure were part of the PE business.

“This is more true in case of unlisted companies like Subhiksha as there is no exit option available to PE investors. All PE investors live with this risk of illiquidity (in case of unlisted companies) in comparison with their investments in listed firms,” he said.

On Subhiksha, he said its effort to match the expectations of market value forced it to open 1,100 outlets across India, a move that created problems for the firm.

“This (Subhiksha) definitely raises issues about preparedness and scalability of Indian businesses and can put pressure on PE funds to re-look at their investment strategy in India,” Thunuguntla said.

Subhiksha was doing fine till it had 180 outlets in the Chennai and Bangalore region over a period of nine years.

On the outlook for the PE space, experts said, the combined effect of Subhiksha and Satyam would lead to tightening in the credit market. The resultant cash crunch would restrict big-ticket commitments by PE funds in the coming years.

“However, for any cash-rich private equity fund, it is the right time to buy stakes in quality companies at reasonable valuations,” Thunuguntla added.

Meanwhile, as promoters are not showing any intention of reducing their valuation expectations, it is getting difficult for PE investors.

In 2008, the total number of PE deals announced stood at 312, with total announced value of $10.59 billion. In January, the number of deals announced was 14, worth $202.22 million, compared with 57 deals amounting to $1.51 billion in the same month the previous year.

Most PE firms have not disclosed any significant change in their investment strategies but an official from a leading PE fund said the bullish phase was over for the country and they expected to generate lower returns in the coming years, compared with huge gains in the past.

Domestic consumption and infrastructure-related sectors are likely to see the highest PE activity in the next 12 months.

“The government is willing to inject money into the infrastructure sector to maintain the momentum, therefore there will continue to be good PE opportunities,” global consultancy Deloitte said in a report.

KPMG’s Vikram Uttamsingh said the PE scene in the country had fundamentally changed not because of Subhiksha or Satyam but because of the economic downturn and the stock market crash.

PE firms needed to be much more focussed on working with their portfolio companies to create value, he added.