Our first call is to the CEO of one of the biggest beneficiaries of the Private Equity (PE) boom – Ernst&Young , the biggest of the big four, and a firm currently flooded with work from PE players and its investee companies. “We have worked extensively with the 30 most active funds in the last one year. PE has no doubt entered main stream business in India a big way,” says Rajiv Memani, managing partner, E&Y .
The second call is to Cyril Shroff, managing partner of law firm A m a r c h a n d Mangaldas, and he isn’t complaining either. “Business has grown substantially. PE clients demand quality and people who are committed to time. They don’t haggle on fees and typically get Rolls Royce service . They say jump and you say how high,” he says.
The third call is to Y Rama Rao, the founder of boutique investment bank Spark Capital in Chennai, who estimates the eco-system that has been built around PE – investment banks, accounting firms, lawyers, head hunters – has grown more than ten-fold in the last five years and should be billing in excess of $100 million per year. “Five years back this would have been under $10 million,” he says. A few more calls and it’s confirmed. The PE play in India is rocking and PE has become a powerful constituent in the new Indian business ecosystem.
It’s a trend that shows no sign of slowing down and its power can be felt right through India Inc. From a pure investment point of view, PE firms have pumped in $25 billion into Indian companies over the last four years, with around $17.5 billion being invested in last 15 months in 487 companies, according to Arun Natarajan of Venture Intelligence.
From the market participant’s point of view, research from KPMG points out that there are 255 active funds in India and many more heavyweights like KKR and Bain waiting to come in. So, the party is set to get bigger.
In terms of sheer influence, PE nominees sit on boards of more than 1000 Indian companies and that includes some of the largest Indian companies like Bharti, Tata Teleservices , Idea and Pantaloon.
The peripheral industry around PE is already worth more than $100 million and growing. The numbers may be small when taken in the global context, but for a sector that truly came on its own just four years ago, it’s a remarkable footprint. In the late 90s, you could count funds on your fingers – Baring , CDC Capital, Draper, HSBC Private Equity, Warburg Pincus, Chrysalis Capital. Now even I-bankers feign ignorance over some exotic sounding funds. It’s not an 800-pound gorilla yet, but it’s well on its way to becoming one.
But speak to PE CEOs in India about their increasing power and they slink away. That’s because PE firms abroad are often looked upon as vultures preying on faltering companies – downsizing, stripping assets , siphoning of funds, loading firms with debt, and charging them ludicrous amounts of money as management fees. But that’s not the case in India. Why? Because the nature of the beast is different in India. PE firms in India have charted a very different course due to the stage of the economy and the level of maturity of Indian companies.
Unlike in developed markets like Europe and US, PE firms in India have behaved more like Venture Capitalists (VCs), investing in growth capital and restricted themselves to taking minority stake in companies rather than buyouts . “Globally more than 80-85 % of PE investments go into buyouts. In India the buyouts do not even make up 5% cent of total investments. Investments in growth capital and minority stakes are the order of the day,” explains Rajeev Gupta, MD, Carlyle.
There are other differences. Most of the minority investments in Europe and the US go into unlisted companies. Out of the 10-15 % total growth capital investments, 95% goes into unlisted companies. In India , on the other hand, a large chunk of minority investments go into listed companies. Experts say that’s because Indian companies tend to take in PE very early in their lifecycle in the belief that PE firms add value and add credibility while going public.
PE has hence largely played the role of ‘impact’ capital in India. Pumping in money, PE firms work closely with the promoters to take the company to the next level. “It’s a high intensity-high engagement model,” says Nainesh Jaisingh of Standard Chartered Private Equity. “We change the company’s growth trajectory.” ABJ Shipyard was valued at $200 million when Standard Chartered private equity invested in the company in 2005 — today it’s valued at $2.2 billion.
Executives of leading PE funds are involved in strategy, business development , M&A support, talent acquisition and helping the investee company go public. Companies like Bharti and Suzlon are great case studies of how PE firms have helped achieve superlative growth.
The spreading of PE’s tentacles can also be observed if you study the recent M&A trends. The PE firms have started playing a role by funding acquisitions of companies, both domestic and overseas. Some of the domestic and overseas acquisitions of companies like Amtek, Welspun, Punj Loyd, BILT have been funded by the PE firms. Even after acquisitions sometimes, PE has a role to play.
For example, when Havells acquired a company in Romania last year, they took on a loan of 200 million euros, and when they were looking to reduce the short term debt of 50 million euros, the option was either GDRs or PE. Warburg Pincus then stepped in with a $110 million capital infusion.
“Besides reducing debt we were also looking for a long term investor who understood the business and would be a ready partner for future acquisitions ,” says Anil Gupta, director, Havells India. Experts say instances of PE firms partnering with Indian companies to acquire will only grow, and collaborations like the partnership of Mahindra & Mahindra with ICICI venture funds for Italian gear manufacturer Metalcastello will go up.
An important indicator of the growing power of PE is the changing competitive scenarios of some sectors after players raise capital. In sectors like financial services (especially brokerages ), alternative energy and logistics, firms have sold stakes to PE firms because access to capital was becoming a competitive strength. In 2007, $4,000 million was the total PE inflow into the banking and finances sector; broking houses received Rs 2000 crore of that.
Traditionally brokerage houses had very limited means of raising capital. Dinesh Thakkar, Chairman and MD of Angel Broking explains, “You can deploy money from your profits back into the business but that’s a slow process.” To compete with the big guys in the business like Reliance Money, which has a lot of muscle, and also other firms who had all raised money through PE investments or were in the process of raising funds, it became imperative for brokerages to raise PE funds.
“How much capital can a promoter keep pumping in? We could’ve listed, but to explain to the layman investor our kind of business model and to explain to them that there won’t be any dividends for 5-10 years is hard,” he says. Angel Broking raised Rs 150 crores through placing a stake with IFC. “PE investments have clearly catalysed some sectors,” adds Memani.
Experts say, real estate is one sector in which PE will play a big role in development . That PE has been accepted as an established mode of raising capital and will definitely have a larger role in future of India Inc is proven by cautious Indian business houses like the Tatas, Reliance and Birlas going for PE investments, especially in infrastructure businesses.
According to Ibankers , even firms like Vedanta, Essar, and Ranbaxy have looked at PE options in some of their recent initiatives. “The bigger groups will take in money in business models which will play out in time,” says Jaisingh of Standard Chartered Private Equity. Promoters no longer want to own 100% but are happy with a certain required amount of equity.
And just the fact that bigger conglomerates are themselves starting their own funds shows that the PE play will only get stronger over time. A PE firm like Future Capital is part of a group wherein one of their flagship companies Pantaloon is an ICICI venture investee company itself. “These are companies with strong balance sheets and the sheer scale of the opportunity is enticing them to make their own PE play,” says Arun Natarajan, of Venture Intelligence.
Another very strong indicator of the growing clout of private equity is the kind of talent it is drawing. PE has clearly replaced consulting and I-banking as the profession with the top draw for the best talent. According to leading headhunters, at least 40 Indian CEOs would have joined PE firms in the last one year including Ranjit Pandit and Leo Puri of McKinsey, Jacob Kurian of Titan, and Rajeev Bakshi of Pepsi. “Increasingly , the CEOs are feeling that PE allows them to add value in a diversity of situations and have real impact in investee companies,” says Anjali Bansal, country head, Spencer Stuart.
Other factors like the influence that capital brings and the chance to create value for investors and themselves also motivate talented people to join PE firms. The PE investments in the country are set to increase with the IPO market going down and the tightening of ECB market by the regulators. With new funds clambering in and the Asia-Pac component of global funds increasing, the India market will definitely see more action.
As the economy slows, the market for buyouts and distress assets could also open up. The demand for PE is there. Given the fact that only one-third of PE deals ultimately close, means that more than 3000 companies had tried to raise capital from PE firms in the last four years. That PE players thought they were not investible is another matter, but a lot more will be ready soon.
On the other hand, some of the established PE funds have also started bringing new models into India. So some real estate funds are launching SPVs for special projects, while some firms like SAIF Partners and TV 18 have launched a Home Shopping channel that is a JV between the PE firm and the media company. Similarly , Sasken Communication Technologies and IDG Ventures India have floated a joint venture ConnectM Technology Solutions with a $6-million investment. Such spin-outs could be another exciting possibility. New sectors opening up, newer funds and much more monies coming it, the gorilla can only grow larger- stronger.
Source: Economic Times