'PE/VC funds replacing global strategic investors', says Amit Chandra

PE/VC investments are dwarfing foreign institutional investor (FII) flows: Chandra

With the government announcing the setting up of a committee to help accelerate private equity and venture capital (PE/VC) inflows, Amit Chandra, chairman of Bain Capital and also head of the Confederation of Indian Industry (CII) committee on PE/VC funds, talks to Surajeet Das Gupta about the opportunities and challenges for the industry. Edited excerpts:

Why is this sector becoming so important?
 

The industry has seen a trend of accelerating inflows. From $20-30 billion per year a few years ago, last year we touched $50 billion and it accounts for the lion’s share of the country’s foreign direct investment (FDI). Global strategic investors have become insular and PE investors have replaced them. PE/VC investments are also dwarfing foreign institutional investor (FII) flows. And unlike FIIs they are stable. In the last five months, FII outflows have been around $13-14 billion due to the war and the US Federal Reserve tightening monetary policy. But PE investments have seen inflows of $1-2 billion every month.
 

The government has realised this and is setting up a committee to see how this can be accelerated. After all why can't we got to $75 billion. 

You said strategic investors have become insular? Can you elaborate?
 

After the pandemic’s outbreak many strategic investors felt there were issues in their home market, so they first fortified their positions there.  In some cases, global strategic investors took their home country’s help. If you take such help, the last thing you will do is buy into foreign companies. Lastly, many sovereigns raised the barrier a little bit for cross-border investments. However PE/VC funds have been seen as neutral capital.

The government has big plans for asset monetisation of infrastructure projects. Will PEs like you participate in this?
 

It’s a very interesting opportunity. But the way it might play out is different as there is no ownership opportunity, but it is an opportunity to |participate in the cash flow. The way it will end up working is that investors will participate through companies in which they already have a stake — it does not matter whether it is control or not. There are hundreds of such companies in which global PEs have stakes in India. And there are a lot of amazing assets from roads to ports, amongst others. Anything that will require capital, investors could step up to fund such transactions through equity inflows using a rights issue or preferential issue in companies where they already have stakes. We see many companies will bid for these assets.

Do you see PE firms playing a larger role in the debt market, especially when banks are chary to give loans beyond ‘AAA’ companies?
 

I think there will be an overall pickup in this space in the next 12-18 months as we will be on the cusp of a capex cycle. When that happens you will see many interesting moves, like banks and non-banking financial companies (NBFCs) looking to raise equity from PE players.  We are already seeing early signs of that as people are seeing the opportunity of credit growth after a long period. Two, we have to look at the underserved segment like MSMEs, which cannot languish and between banks, NBFC, and PE/VC players we have to work together with the government to get this right. This might require policy intervention and pain points have to be removed.       

The focus is on creating Atmanirbhar and vibrant domestic PE/VC industry. Is there enough money to fund them?
 

There is a lot of money for asset classes that create good returns. And it is self-funded as a decent fund makes about 2.5 times return in five years and if the industry is growing at 15-20 per cent, it means that it is always self-funded. You will always have more capital than you can deploy. If you ask market participants, the good funds in the last 12-18 months have been massively over-subscribed and many have had to increase their fund size. But we have too few domestic funds.