Alternate capital

Private equity and venture capital investments look forward to Golden Age

Alternate capital
Alternate capital

The private equity and venture capital ecosystem is growing at a rapid clip in the country. An EY estimate shows Indian PE/VC segment has grown from about $200 million in 1998 to nearly $39.5 billion in 2017, growing at a compound annual rate of 32 per cent. As India builds on its economic heft, the role of PEs/VCs is poised to grow in importance.

“We believe that the next five years will be the Golden Age of the Indian PE/VC industry. Political and policy stability permitting, by 2021, annual Indian PE/VC investment levels could potentially be in the range of 1.5x-2x the highs of 2017,” said Vivek Soni, partner and national leader-private equity services, EY India, in a report.

Two recent policy developments, introduction of the Insolvency and Bankruptcy Code and the Goods and Services Tax, have vastly increased PE/VC opportunities in India.

In the first half of 2018, the automotive industry showed strong traction in PE/VC investments with 23 deal announcements compared with 27 for the entire 2017, largely on GST expectation. Also, the financial services sector has overtaken traditional favourites like real estate and e-commerce to become the most favoured sector for PE investments.'The other sectors that are expected to see PE/VC traction include infrastructure and logistics.

The changes unleashed by the IBC regulation have opened India to a new PE asset class, adding more wind to the already full sails of the Indian PE/VC story. The infrastructure asset class too is expected to see a lot of investment dollars, especially in the roads sector, Soni said.

According to Randhir Kochhar, partner, transaction advisory services, EY, “With the government making infrastructure spending a priority and also limited partners (LPs) like pension funds looking at infrastructure investments as a favourable theme to generate steady and risk-adjusted yields, the infrastructure sector is expected to see continued traction. After the implementation of GST, logistics has gained prominence for e-commerce and manufacturing players, the government has also recognised the importance of the sector to facilitate trade and commerce and granted it infrastructure status..”

He said the next 12-18 months would see heightened PE activity in the automotive sector, “with large private equity funds contemplating sizeable investments in the sector.”

 

Experts said IBC and other conducive government policies have raised PE and VC interest in stressed assets in the last 18-24 months. Investors now have a resolution process that has a structure, well-defined processes, time lines, responsibilities and protection than before.

“To take benefit from the changing environment, a host of global investors have sprung up looking for investment opportunities. They are exploring different routes to participate in the distress asset sale in India, both under a formal insolvency process and before the start of bankruptcy proceedings,” said Soni.

IBC has seen an unprecedented implementation journey in the last 18 months as over 800 corporate debtors have been admitted into the resolution process. There are about 1,800 insolvency professionals and 80 insolvency professional entities, six registered valuer organisations, three insolvency practitioner associations and one information utility functioning as a part of the ecosystem.

Soni said limited partners (LPs) traditionally invested into PE funds and remained as the only financial investors, however, of late, LPs such as pension funds, sovereign wealth funds and family offices are looking to invest either directly or in partnership with their general partners (GPs).

Canadian Pension Fund CPPIB has made many such investments in India last year, as also funds like GIC of Singapore, ADIA of Abu Dhabi and others, he said.

According to EY, investors exploring India’s distress assets opportunity include Liberty House Group, Piramal Group, Bain Capital, Kotak Mahindra, Deccan Value International, Canadian Pension Fund CPPIB, Srei Alternate Investment and JM Financial.

Initial public offerings (IPOs) have become an important exit route for the PE community. During 2015-17, PE/VC exits amounted to $26 billion. However, given the recent volatility in the mid-cap and small-cap space, there could be some delay in IPOs of PE-backed companies as the market conditions are not ideal now for fresh share issues.

“We believe that the strong PE/VC exits seen in the past three years (over $26 billion) have played a material role in ‘re-rating’ the India PE/VC sector in the eyes of global LPs. These exits have underlined the ability of the Indian market to return foreign capital to LPs with returns, which in turn will attract more LPs,” Soni said.

PE/VC is an emerging opportunity for Indian investors looking for superior returns and businesses seeking cheaper capital. A recent CII private equity and venture capital summit noted that not only the PE/VC industry but also the investors who have placed their funds in these companies are coming of age in India. Since these investments have given high return rates, more and more long-term investments are coming into the funds.

“It is a great time for the entrepreneurs to understand what the PE and VC firms stand for, how investments can be chalked in and how the funds can be used in a better way,” said PE players at the summit participating in a discussion on the ‘importance of alternate capital’.

“Private equity partnership is not just a source of capital; it brings along with it expertise which help entrepreneurs to grow and prosper, which in turn, gives good returns to the investors,” said Sanjay Nayar, chairman, CII national committee on private equity & venture capital and CEO, KKR India Advisors.

“Given India’s growth trajectory, the country’s growth should come from the private sector investments made by industry in cement, steel, real estate, etc for which long-term capital is essential. Traditionally the industry has been dependent on the private and public-sector banks. However, the banking industry is facing a lot of restrictions and even if they do have money it’s a short-term investment, and hence the industry is going to be dependent on PE and VC for capital,” Nayar said.

“Private equity provides long-term savings to industry, better operational mechanism, international linkages and good management talent and expertise,” Nayar said.

PE players also feel that PE?funding comes along with strong support to take the company in the right direction for future growth.

“Engaging with the private equity and venture capitalists is not just a plain capital partnership, it is an ‘intelligent capital partnership’ to develop as a successful and sustainable business,” said Munish Dayal, senior partner, Barings Equity Partners.

“India is a $2.7 trillion economy, which is growing at a fast pace and is expected to reach the $5-trillion mark within the next five to seven years, and at least a trillion of this is going to come from businesses that are very nascent and entrepreneurial and hence, PE and VCs are going to play a major role in upholding these businesses and driving the industry henceforth,” said Rajan Navani, vice-chairman and managing director, Jetline Group of Companies.

Padmanabh Sinha, managing partner, Tata Opportunities Fund, said, “PEs played a role in scaling up entrepreneurial businesses by assisting in capital growth, corporate governance and talent acquisition.”

Let a thousand PEs/VCs bloom.

raviranjan@mydigitalfc.com