Looking back, looking ahead

2012 witnessed a lack of exits and tough fundraising in the PE/VC sector. Six top fund managers tell Reghu Balakrishnan about the challenges, outlook for 2013 and how to get back on track

If there is a turn in the sentiment and investment cycle, we will see a lot more demand for private capital

SANJAY NAYAR,
CEO & Country Head, KKR India

The volume of private equity investments in India was fairly ]low this calendar year, as compared to 2011 and 2010. However, there has been a turnaround in investor sentiment and long-term investors continue to bet on the India growth story. Strategic investors have always liked India and continue to do so, as India is a huge consumption market, most sectors are underpenetrated and companies have strong growth potential, which have yielded huge returns in the past.

 

Private equity is a phenomenally important asset class for India and it is important to build a positive investment climate to override the macro headwinds, to make businesses feel confident about investing again.

Outlook for 2013
There lies a strong need for strategic long term patient capital to fuel India's growth. As we look ahead, if there is a turn in the sentiment and Indian businesses begin to invest again in real assets, they will need capital.

We will see a lot more demand for private capital. In that context, there will be a lot more investment opportunities in the future to really build world-class companies, especially in the consumer-facing and infrastructure-related industries.

Exits from investments in India
Strategic long-term investors have enjoyed huge returns in India in the past. Despite the volumes being fairly low this year, once Indian businesses begin to see an environment for growth, they feel confident about investing again, they will look for patient long-term strategic capital — that private equity as an asset class can provide, to chase that growth.

View of global limited partners on India in 2013
First, businesses need to consider the realistic growth rates they would like to realise. Second, private equity firms need to gauge if Indian companies are ready to embrace private equity with all the operational value add they can offer, to become better, more efficient, more capital-efficient, more operational-efficient. Last, watch out for currency fluctuations to see if deals are feasible and profitable.

We will see greater consolidation

VISHAKHA MULYE,
MD & CEO, ICICI Venture

2012 was a tough year for the Indian PE sector, notably because of an adverse investment climate, prevalent for most of the year, albeit with some pick-up towards the last few months. We increased our three-year exit tally by $250 million to $600 million across 30 exit transactions and, hopefully, this will increase by another $100 million over the next couple of months. We deployed about $100 million in new investments across a variety of interesting spaces. We established two new practice areas — infrastructure and special situations.

Outlook for 2013
One could expect greater consolidation in the sector due to the continuing flight to quality among international LPs (limited partnerships). Post crisis, LPs have become more rigorous in their choice of GPs (general partners). They also prefer to back fewer GPs and preferably those with a multi-strategy approach. This will impact the evolution of the Indian PE landscape in the long term.

Exits from investments
The sector has been far too dependent on capital markets. At ICICI Venture, in the last three years, only 25-30 per cent of our exits have been realised from there. On the buy side, the Indian PE industry is gradually becoming more open to secondaries than before, a positive factor. This would probably drive more PE-PE deals. Given the significant ‘dry powder’ (unused capital), estimated at $15 billion, with Indian or India-oriented funds, this could be a big driver for exit activity. Of course, one can also expect an improvement in the overall capital markets scenario, due to the pro-active stance of the government in the recent past, coupled with some momentum in the initial public offering markets.

Power and telecom sectors will remain muted

AKHIL GUPTA,
Senior MD & Chairman, Blackstone India

Let us understand the backdrop of the environment faced by PE players. A slowing economy, a new low in the investment cycle and global uncertainties were negative for PE investment. But, the positive aspects were the virtual shutdown of public markets and non-availability of finance for real estate projects. In this environment, Blackstone India did quite well. We committed $600 million over seven deals in real estate and corporate private equity.

Outlook for 2013
Year 2013 will be very similar to 2012. However, an improved policy environment and the pace of reforms recently unleashed will improve sentiment.

I presume the US will solve its fiscal issues by January and no deterioration in the global economy in the European Union or elsewhere. The traditional sectors that are heavy users of PE such as power and telecom will remain muted. External sector-related projects will remain weak.

We will continue to see investments in sectors that straddle domestic demand, both urban and rural.

Exits from investments
Yes, it is a concern. However, PE players have a long-term horizon and a relatively large flexibility in timing of the exit. Yes, all PE players would like a few exits, and it will be very good for India to provide a few good exits to attract the amount of investments we deserve, given the fundamental promise of the Indian economy and the robust, albeit noisy, functioning of our democracy. At least for now, lack of exits has not affected fresh investments significantly but it will if the environment for exits does not improve over the next 12 to 18 months.

With valuations coming off, the investment environment for PE is quite conducive

DEVINJIT SINGH, 
Managing Director, The Carlyle Group

Significant PE capital was invested in India during the 2006-07 period, and it is very important for this vintage of investments to see profitable exits and distributions. In this context, 2012 was an important year for the sector. Carlyle’s successful exit from HDFC, aggregating in excess of $1.2 billion, has given investors reassurance that India is a market where successful investments can be made, as well as exited.

Outlook for 2013
While the economy has slowed on the back of macro headwinds in the form of high inflation and twin current account and fiscal deficits, the investment environment for PE is conducive. Valuations have come off, public markets are more discerning as a source of capital, and there’s an increased understanding in the Indian business community of PE as a form of long-term, value-added capital.

Big-ticket or buyout deals in 2013
We are also seeing an increase in discussions in the buyout space. And, expect this market to develop over the next few years, as businesses go through generational transition and conglomerates divest non-core assets.

Secondary exits are more frequently seen

Outlook for 2013
It must be remembered, though, that corporate India also consists of many seasoned businessmen, who have seen much tougher environments, such as in the early 1990s. Their experience and resilience is very valuable and PE investors would do well to back them. The global and local economic and political scenario is likely to remain uncertain and volatile in 2013. Having said that, India remains a fundamentally attractive long-term play, primarily on account of its demographics. Identifying opportunities that balance these two sets of dynamics will be the challenge for PE investors.

Exits from investments
PE investors have come to terms with the fact that they cannot rely on the IPO markets or public markets for their exits. Secondary exits to other PE investors, and strategic exits/trade sales are more frequent.

The single biggest issue is the need to show more exits

PARAG SAXENA,
CEO, New Silk Route Partners

The single biggest issue facing the sector is the need to show more exits, both in terms of the amount of realisations, as well as IRR (internal rate of return). From a PE industry perspective, given the prominent role it has played in funding entrepreneurs in the last decade, the norms for entry and exit should be simplified to the maximum extent. Other challenges are slowing growth, very high interest rates and a declining rupee.

Outlook for 2013
There will be increased pressure on companies to have IPOs or strategic sales. Limited partnerships (LPs) have had less that 10 per cent of the money invested in Indian companies returned to them since 2006.

Funds (general partners) will be increasingly concerned about raising liquidity for them. Indian entrepreneurs are now recognising private equity partners as legitimate partners in the growth process. In the coming years, there will be a greater acceptance of what is required by PE investors.

View of LPs on India in 2013
Some entities that have not yet invested in India will look for the best funds. Others will wait for returns to actually occur from Indian companies.

Additionally, the relative unattractiveness of India led to a drying of capital for unlisted companies. The sector can overcome these challenges only if these change i.e. if there is a drop in interest rates, the rupee ceases to be under pressure, etc.

 

NAINESH JAISINGH, 
Global Co-Head, Standard Chartered PE

Weak and uncertain public markets underline the need for PE as an alternative source of capital. The challenge is for valuation expectations to be managed on both sides. Value creation needs to be a collaborative process between investor/entrepreneur over the investment period, rather than a binary outcome based on price negotiations at the time of investment. This theme will drive successful PE investment models in India over the next few years.