The temporary overheating of the Indian markets has led private equity (PE) investors opt for the cooler environs of south-east Asia.
“The valuation of Indian companies is very high. But since this is a temporary phase, we are looking at SE Asian markets instead for tactical reasons. In India, we see a lot of capital chasing limited numbers of deals, but we get better deals outside India,” said Electra Partners’ Hong Kong-based head of Asian markets John Levack. Mr Levack is the UK-based private equity company’s representative on the board of directors of Zensar Technologies. He was speaking to reporters on the sidelines of the IT company’s AGM.
Since Electra’s Asia strategy, where it has invested $150 million, is to invest in markets and companies with an export focus, Mr Levack said despite the fantastic growth of many sectors in India, they are not investing. The valuations of Indian companies, which in terms of price earnings ratio, are only behind China, Nasdaq and Tokyo, making India relatively more expensive than even the UK or the rest of Asia. In fact, the PE ratios in India are now higher than even those in the Harshad Mehta, Ketan Parekh bull runs, Mr Levack remarked.
With the competition of too much capital chasing limited numbers of deals, Mr Levack pointed out to the emergence of a dangerous trend — that of private equity players not doing their due diligence.
“With the competition, some investors are cutting down the amounts and conditions they will build into a contract. They are not doing sufficient due diligence, they may be willing to overlook corporate governance or not insist on a seat on the board,” he said.
Mr Levack cited a study done by Electra Partners last year, which looked at all the new money raised via IPOs and measured the price earnings ratios of private equity-backed companies with those that were not. Those companies, which were backed by private equity, fetched a 35% premium on their PE ratios over those that were not private equity-backed. The implications are clear: If private equity is to retain its premium edge, investors must insist on a full due diligence.
Given the over-heated valuations and the very high price earnings ratio in India, Electra Partners has chosen to focus on the Philippines and Thailand.
“We have invested in two BPO companies in the Philippines since they are better than Indian BPOs when it comes to US accents and in areas where the intellectual challenge is lower. Historically, the Philippines has a low staff turnover compared with India when it comes to the less exciting end,” Mr Levack said. He added that in Thailand, they were looking to invest in specialist skills. The China story, for private equity firms, is one of risk versus rewards, Mr Levack indicated.
Source : Economic Times