The year 2018 was marked by governance failures. Hindsight is 20-20. So when one makes the claim that 2018 was the "annus horribilis" for corporate India, it is easy to counter that one saw it coming -- Nirav Modi, Mallya, Videocon, IL&FS and others, usually in cahoots with Indian banks and/or bankers. We even exported our corporate habits with the Guptas and Bank of Baroda capturing South African headlines.
To be clear, governance failures are not unique to India. We were regaled this year by events concerning 1MDB and Goldman Sachs, as we have been in the past by episodes such as Madoff and Enron.
With this backdrop, operationally oriented PE firms have played a role as a catalyst for reform. The adage "good governance is good business" never rang truer. With the focus on governance has come a transition from passive to active shareholder management, implying greater operational involvement. Examples include PE investors acquiring control of Religare, attempts to restructure Jet Airways and so on.
Opportunities abound for operationally-oriented PE investors
The Indian industry has extraordinary opportunities arising from recently implemented economic reforms. The goods and services tax (GST) has created a seismic shift in the way manufacturing and logistics companies operate. The Indian Bankruptcy Code and Real Estate Regulatory Authority (RERA) processes have re-instilled an element of trust, critical for "ease of doing business".
Due to macro factors, including the China slowdown, several manufacturing sectors such as chemicals and pharmaceutical are seeing boundless export opportunities.
In order to capitalise on new opportunities created, we expect to see operationally-oriented PE investors serving as active shareholders. Successful value addition comes from the alignment of incentives between management and shareholders, assistance with operating performance improvements and capital allocation, mergers and acquisitions deal support and financing.
In 2019, the focus on governance will result in higher quality deals, but lesser quantity. The new year commences with geopolitical and economic headwinds on the global stage. Uncertainty prevails on the direction of commodity and currency markets, interest rates, policy and political regimes. Global investors are nervous though some of the smarter and more seasoned ones smell opportunity.
Indian equity markets didn't perform too well in 2018, with the BSE-500 20% down in dollar terms. In 2019, electoral and economic uncertainty will make many investors hesitant to allocate new capital. We expect that uncertainty, as well as the heightened focus on governance and active shareholder management, will result in far lower deal volumes in 2019, particularly compared with the years from 2016 to 2018 when approximately $20 billion of PE investment occurred annually.
For the same reasons of uncertainty and focus on governance, we also believe that 2019 will be an excellent vintage for the new deals that get done. Factors contributing to success will include reduced competition for new deals, greater operational involvement with receptive management teams as partners, and reduced valuations at the start of the year.
In short, while the quantity of deals done will likely reduce, the quality of these deals will vastly improve.
Raghavan is a Managing Partner at Convergent Finance. He was former MD at Fairbridge Capital Pvt Ltd, an adviser to Prem Watsa's Fairfax India Holdings