A highlight of 2018 was the focus on buyouts across the board. Additionally, there was a lot of pressure from the banks on select large corporate houses to offload select assets. With IBC, corporate groups considered selling some crown jewels, too. While there were opportunities, there were challenges, too, including ‘actionability’ and whether a deal ends up getting consumed.
At a macroeconomic level, growth has been a bit lacklustre in the past 24 months, GDP, market capitalisation and corporate profits have recorded growth in a descending fashion relatively. Corporate profits not growing is a concern, as we underwrite future deals and current portfolios but we believe this is transient and already seeing changes.
Outlook for 2019: The formalisation of economy is expected to manifest in 2019. In terms of value creation in our portfolio, with the right combination of entrepreneurs / management teams and focus on operations, growth will play out in the coming year. The private equity market has matured quite a bit with good number of peer-to-peer sales (smaller PE firms selling to larger peers). This apart, for promoters there is no longer any stigma if they cannot hold on to their assets forever. So, we may continue seeing a lot of buyout opportunities. But there is a flip side, considering where the markets are in terms of valuation. There is also a lot of competition among domestic and international strategic players.
Themes & trends: If you go by the demographics of the economy, because of the implementation of demonetisation and the Goods and Services Tax, a lot of consumption- and logistics-linked sectors are attractive. If capex revives at some point in the country, you will also see opportunities in industrials as well.
LPs outlook: Overseas investors will continue to look at India and large corporates will continue to make acquisitions. Capital markets are much more robust and deeper now after demonetisation. We do not see that changing now. If there is a worldwide recession, capital markets may become bearish. But our experience suggests that good companies always have a buyer in each of these exit scenarios.
Year for KKR: What is occupying our mind is working very closely with companies we have invested in. More than being singularly focused on sectors, we are focused on situations as well, because the true value of private equity is unlocked when we can help solve for situations via combination of our financial and operating capabilities. From a sectoral perspective, we find sectors such as IT, healthcare, financials and consumer as good bets for investment.