India is a much more steady market than China and presents a great long-term opportunity, Bala Deshpande, senior managing director at private equity firm New Enterprise Associates (India), tells Sumit Sharma. Excerpts:
New Enterprise Associates (NEA) has more than $11 billion in its global funds. How much could you invest in India?
We are currently using the $2.5-billion NEA-13 fund to invest here. We do not follow a fixed allocation (strategy) and are looking to invest a significant amount in the next two-three years. We are focusing on the mid-market opportunity in India and our deal sizes will be upwards of $10 million.
How much have you invested so far?
We have done three deals. We can’t disclose the amount. These are — Nova Medical, a chain of day-care surgery centres, a new format in healthcare services; FSS, a leading player in the fast-growing payments transaction processing space; and Intarvo, a company which provides integrated lifecycle management services for technology products.
What are your investments in India likely to focus on?
How are valuations at this point of time?
I liked the valuations last year. After the meltdown, there was a fair amount of correction. At present, given the uncertainty about where we are headed in terms of inflation, costs and margin pressures, we would like to be selective and look at valuations more closely. However, we continue to see deals where growth potential justifies valuation expectations.
Are private equity funds putting more clauses to ensure discipline among promoters so that they deliver what they promise?
As investors, it is very important for us to be disciplined and seek protection. While negotiating with companies, we work hard to strike a balance between investor protection and giving operational flexibility to the company. It is important to create alignment upfront rather than rely solely on penalty clauses, as these may later lead to conflict.
How much investments could flow into India?
This time, unlike the 2000 meltdown, very few funds left the country. Investments were put on hold but funds were waiting in the wings. In 2007, before the downturn, one expected private equity inflows (not including real estate and infrastructure) to be around $6 billion to $8 billion. And I think that number holds true today as well. The increase from here will be steady and not dramatic as we saw from 2002 to 2007. India is better understood now and so fund inflows will be more measured and systematic.
How many deals could you do this year?
We are witnessing a good deal flow in some fast growing and undiscovered sectors in India. So, we expect to do two to three more deals this year, provided there’s a meeting of the minds on valuation. We have done two deals this year and one last year.
Do we see a change in the size of deals?
Deal sizes are gradually moving upwards across all stages. For example, early stage investing, which used to be in the $2 million to $4 million range, has now increased to around $5 million to $8 million. In addition, growth equity deals, which were in the range of $10 million to $15 million a couple of years back, are now in the $10 million to $40 million range. Similarly, with increased investing by large funds, we expect the average deal size to increase further.
Do you see new private equity players coming in?
Yes, I see a significant trend of a large number of general partners setting up their funds. In keeping with global PE markets, India is seeing all types of private equity players, including global funds, domestic institutions and partnerships started by teams or individuals.
Are limited partners (LPs) happy with the returns?
It’s still too early. The industry in its current form is just about a decade old and some funds are still to return the money. Funds saw a good run in terms of return in 2003-2007 but it is too early for LPs to conclude either way.
How do they compare India with China?
The two offer different opportunities in terms of risk-return profiles. China’s GDP, in PPP (purchasing power parity) terms, is nearly three times that of India, so the market there is much larger. Some companies there have grown their revenue from zero to a billion dollars in a relatively short time. India is a much more steady market and presents a great long-term opportunity.
What are the risks that private equity players face in India?
tend to create sector bubbles. If a sector is considered attractive, capital flows into these sectors in large quantities and quickly, leading to increased asset prices, thus diminishing the sector’s attractiveness. If this behaviour is corrected, all stakeholders stand to benefit.