TPG Growth, the middle-market buyout and growth-equity investment platform of Texas Pacific Group, started its investments in India in 2009. So far, it has made investments in Sutures India, Flexituff, AGS Transact and Greenko. Vish Narain, country head of TPG Growth - India, joined the firm in 2007. He speaks to Reghu Balakrishnan on the challenges and areas of interest for PE growth funds in India. Excerpts:
Why is there such a long delay in concluding PE deals?
Since January, I've seen that deal flow has picked up. It has been a while since capital markets have been shut. Not much deal activity has been happening. While there are active bankers and good deal volume, the deal quality is still not super high. Large conglomerates have also been looking at doing PE deals for a while. So a lot of people are saying that rather than paying 13-15 per cent interest rate, think of monetising the asset.
But promoters in the consumer goods space don’t seem to be so desperate to tie up deals...
This is because they don’t need money. Consumer goods, IT services are cash-generating businesses. It’s people in the infrastructure and financial services space who need capital on a regular basis. Those are the investments that are basically been in the lock in.
What’s your view on the current market?
We are experiencing the slowdown with high inflation and low industrial growth. So for India, I think this time is probably as bad as the time I had seen 15 years ago. I don’t remember the growth rate being so low and a growing sense of pessimism that if you don’t get things right, we will lose an opportunity. The next couple of years are very important. It is not only about the change in government - it is about restoring the confidence. Losing confidence is easy but to restore confidence takes a long time. We have a situation in India where foreign investors can sometimes see opportunities that local investors are missing because of the rampant inflation here that can dampen any optimism.
In such a situation, what would be the stance for TPG growth fund?
We are looking at investing in early-stage companies where we buy large controlling stakes in smaller companies and platform deals. These could be in consumer space, financial services, or healthcare. It doesn’t matter if it is a small platform deal. If we’re able to grow a company from Rs 50 crore to Rs 300 crore, the value you create is much larger than what you can create if you buy or invest in a Rs 300 crore company, taking it to Rs 600 crore even if one has grown by the same amount. We are backing companies that have 20 years behind them.
So we are looking at financial services where credit growth is still at 15-18 per cent. The penetration of some of these sectors is low, so they will continue to grow for at least a couple of decades. We are less excited about asset-intensive industries such as power projects and infrastructure projects, which are also coincidentally in the purview of government regulation and government policy changes. Also, at the moment, a capital-intensive business takes longer to create equity value. So I think these are the sectors that we have deprioritised.
One thing we have noticed is the weeding out of funds in India...
Funds that deliver good results will get more capital. In our business, it typically takes about 10 years to weed out poorly performing funds. Hedge funds have a three-month redemption process, so you can essentially have more funds going out of the business much quicker than the PE world, where investments are typically made for a 10-year period. So, the impact of poor performance is not experienced immediately, and it is now that we are seeing some of those less performing funds not getting funded again.
E-commerce space is the hot sector for all PEs. Have you not explored much in India?
No, we have explored. We have looked at a variety of companies. We have not yet found something which will excite us enough. Globally, of course, we have a lot of investments in this space. I think the challenge with India is that there are few companies which are working well; they have already been capitalised and are at valuation levels which are beyond the risk level that we perceive.
Myntra, Flipkart, etc. Frankly, you have to be early. If you don’t get in early enough, then it is too late. If they are not yet making money, eventually the goal to get the Indian consumer pay for convenience. E-commerce model offers you convenience. Sitting at home you can buy a book or buy a phone or anything - but one need to pay for that convenience. Indians are not used to that yet. Probably it will happen overtime.