PE returns took a tumble owing to a gaggle of factors such as unfavorable currency rate, regulatory challenges, poor level of governance and expensive valuations.

A decade ago, Indian private equity funds were globally venerated. Often, the mere mention of India was enough to entice investors. It was also a period when the BRICS grouping of nations dominated the strategy of most global investors who wanted to cash in on their high growth rates.

The party didn’t last long. PE returns took a tumble owing to a gaggle of factors such as unfavourable currency rate, regulatory challenges, poor level of governance and expensive valuations. It didn’t help that fund managers were an indisciplined lot. But the worst seems to be over.

New Dawn PE investments in India experienced a robust increase over 2015, according to a report in May by global consulting agency Bain & Co. “Deal value, including real estate, infrastructure and venture capital (VC) deals, increased by 51% to $22.9 billionsurpassing 2007 peak levels of $17.1 billion. Overall deal volume in India grew by 31%. Overall deal value also rose as a result of a few megadeals,” says the report.

India’s strong GDP growth – 7.2% in FY1 compared with 5.4% in FY14 – making it the only bright spot in the emerging markets group has also had a profound impact on PE investors. Canadian Pension Funds such as CPPIB, Caisse de depot et placement du Quebec, or CDPQ, Partners Group and several sovereign wealth funds (SWFs) from the middle east, among others, have established India offices in 2015.

Likewise, recently raised funds such as Renuka Ramnath’s Multiples, IVFA, Everstone and IDFC have all seen a significant co-investment option, embedded by their investors – limited partners, or LPs – enabling them to partner directly in good investment opportunities. Even the exit market in India performed exceedingly well in 2015.

The number of reported exits grew 10% in 2015 from a year ago, and the value of exited investments increased by 57% in the same period, rising to $9.4 billion from $6 billion. Public market sales, secondary sales and strategic sales were equally prominent as exit options. Average deal sizes were significantly higher for secondary and strategic sales.

The Bain report says the number of deals SWFs participated in directly increased to 24 in 2015 from 19 in 2014. PE firms expect co-investments with LPs to further increase in 2016. The recovery has come at a heavy price. Smaller mid-market private equity funds headed by first time managers have mostly been obliterated over the last decade; only the ones with better track record and teams have survived the crushing blows.

This was inevitable. The inability of India to generate billion dollar deals forced most of the large buyout funds to look at smaller deals, thus crowding the midmarket and nudging the weaker players out. A recent annual report by PwC says even traditional global buyout funds have had to tailor their approach and compete in the otherwise crowded growth capital space.

“A lot of people raised funds but not everyone had the capability to deliver,” says Harish HV, partner at Grant Thornton India. Funds such as Kitara, Canaan, Summit Partners, Avigo, India Equity Partners, DFJ and 3i, to name a few, have failed to get a new lease of life from their LPs. Others such as CX, Macquarie, IL&FS have struggled to raise money.

That means it is still early to say that a full-blown recovery is underway. Top PE fund managers reveal that investors aren’t coming in hordes this time despite the government’s best efforts to attract them. The head of global fund in India says investors have learnt that operating in India is not easy. “Indian promoters are difficult to work with.

Controlling and running a business in India needs a different set of skills.” Indeed, even established funds have had to struggle. Take the PE behemoth Blackstone. It got its India strategy completely wrong. After making a series of miscalculated investments in Gokaldas Textiles, Moser Baer, MCX and FT, the fund tweaked its focus in 2014 and is back in the market in a new avatar.

The team under new co-heads Cyriac Matthew and Amit Dixit is now taking calculated bets on sectors they understand well and have tasted success in the past. Even so, the industry has shown remarkable resilience. Though the total number of funds investing in India today has decreased from 177 in 2006 to 103 today, the total assets under management have risen steadily, data shows.

In 2006, 17 private equity funds raised $3.6 billion to invest in Indian markets but nearly the same amount ($3.27 billion) was raised by seven funds in 2015, data from Venture Intelligence shows.

Ecommerce: New Favourite The other big change in the past decade has been the emergence of ecommerce as a high growth sector. The sector has taken the lion’s share of the largest deals in the PE space in the last four years. “The surge in PE investments in 2015 was largely owed to the ecommerce sector which saw deals worth $5.3 billion across 290 deals. Together the sector has seen almost $10 billion of PE investments in 2014 and 2015,” the PwC report observed.

The set of investors in the ecommerce sector is new. The traditional big boys and conservative midmarket investors have consciously stayed away from the ecommerce frenzy. This is because ecommerce businesses continue to make losses and have this failed to justify the value at which they trade to the top global funds. Going forward, further consolidation will occur, with 75 to 80 investors in the fray, according to fund managers and industry watchers.

Ecommerce and buyout funds will continue to dominate the industry. Large buyout funds, late growth investors, early stage investors and the venture capital funds will hold sway over the next decade.

“With fewer players, pricing and deal terms are expected to get more realistic. While adequate opportunities for venture and growth capital will continue to arise from the next wave of professional entrepreneurs, there is a general belief that large funds are likely to see greater buyout opportunities than ever before, as the over-levered corporate India seeks to inject fresh equity by selling its ‘non-core’ assets or giving up control,” the PwC report said.

Courtesy – ET Realty

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