Set back by the economic downturn, foreign and domestic private-equity firms in India are spreading the risk of investing in assets by banding together. Firms are resorting to clubbing together to form a syndicate when acquiring stakes to limit both funding requirements and risk.
“Over the next 12 months, there will be much more syndication of deals and the insistence (by the lead investor) of having other co-investors to bring additional risk bearing capacity,” said Jasmin Patel, Managing Director, FIL Capital Advisors (India), Fidelity's India-focused private equity and growth capital fund.
“The capital required to get a funded firm to a certain maturity point has gone up, so the presence of another investor from a growth perspective and the amount of capital required is becoming a prerequisite,” Mr. Patel said.
Syndication is where two or more private equity firms participate in investing in a company, each putting in part of the total equity package for proportionate amounts of equity — usually with one private equity firm acting as lead investor.
With the Bombay Stock Exchange's benchmark 30-stock Sensitive Index, or Sensex, down more than 52% after three years of 40%-plus rises each year, the country's economy slowing to 7.1% gross domestic growth from 8.8% yearly since 2003, and India's industrial output recording its worst performance in 16 years, private-equity firms are increasingly entering into club deals.
The number of private equity investments in India fell to 399 transactions last year worth a total of $10.8 billion, down from 439 deals valued at $13.9 billion, according to Venture Intelligence, as falling markets made private equity firms wary of investing.
Since August, however, six deals in the range of $15 million-$23 million have been struck by private equity syndicates, according to the research firm focused on private equity & venture capital.
In the January-July period of 2008, about 18% of all private equity transactions were syndicated. But since August, over 29% of all private equity deals have involved consortium buyers.
MAS Financial Services Ltd. kicked off the trend six months ago when Netherlands Development Finance Co. and ICICI Venture, an arm of ICICI Bank put $20 million in the finance firm focused on microfinance. New Vernon India Fund and FIL Capital Advisors also invested $18 million in hydraulic pump maker Dynamatic Technologies around the same time.
A total of six “syndicated” transactions have been struck since August, and if a recent survey of 80 fund managers by Venture Intelligence is anything to go by, the trend will only gather pace.
More than 60% of managers polled expect deal syndication to rise in 2009, while most expect the number and size of investments to drop because of investors becoming more risk averse. An overwhelming majority tip fund raising and exits to also fall out of favor.
Still, private-equity funds won't walk down the aisle with just about any other fund.
“What you need in a syndicate partner is complementary values in business building and a similar kind of time frame (for growth and exit). The patience factor has to be similar,” said Rahul Chandra, director at Helion Ventures.
The controlling shareholder's views also have to be taken into account of when evaluating a deal.
“The entrepreneur should be the one driving the syndication and should come to the lead investor asking for another fund with certain preferred characteristics. We then connect the two together,” said Sandeep Singhal, Director, Nexus India Capital.
Funds are also looking at other ways to mitigate higher risk, increasingly taking into account currency movements and growth prospects.
“This is now about managing currency as much as it is about investment management as the risk of the erosion from a depreciating rupee has come home to roost,” said Subbu Subramaniam, Partner, Baring Private Equity Partners (India) Pvt Ltd.
“It is driving us to look at opportunities where some of this can be protected and hedged like accepting foreign currency convertible bonds that can be converted to equity later.”
The private equity transactions done through a syndicate don't only focus on late-stage buyouts.
“Deals from intermediaries are down. We are also going past metros (major cities) and seeing businesses in smaller cities looking for capital,” Helion Ventures's Mr. Chandra said.
Source: WSJ