By Arvind P. Mathur
Chairman, Private Equity Pro Partners


The Future of Private Equity in India: The Key Drivers 

Introduction

Private equity and venture capital was heralded in India in the 1980s by the early pioneer funds such as those launched by domestic institutions like ICICI, IL&FS, international development banks like the Asian Development Bank and the International Finance Corporation.

Attracted by the success of these early efforts US LPs & Singaporean sovereign wealth funds had the foresight to enter the Indian private equity space in the 1990s through funds managed and sponsored by leaders such as Hank Greenberg of AIG, Warburg Pincus & Barings Private Equity.

While these early efforts were successful they were characterized by typical deal sizes in the range of $ 2 million to  $20 million mostly in early stage and start-up enterprises. There were virtually no buyout transactions. Also the sector was only beginning to gain in maturity with the early efforts of value-addition by private equity firms.

Warburg Pincus was the first to realize the enormity of India’s potential when in 1998 they shook the markets by making a minority $ 300 million private equity investment in Bharti Air-tel  an early-stage mobile phone company in New Delhi. Warburg Pincus exited the deal in the early 2000s with a nearly 5x multiple in a complex exit.

The stellar performance of that deal, 9 % GDP growth triggered by unrelenting economic reforms and the voracious appetite of entrepreneurs for capital led to a stampede of private equity into India since 2002.
Deal volume had rocketed to nearly $ 8 billion in about 325 deals in 2010.

We will examine the key drivers of a thriving private equity industry, which bode well for the future of private equity in India.

The Attractions of India: Warren Buffett

During Warren Buffett’s first trip to India this year he revealed that he regards India not as an emerging market but as an advanced economy.

"I guess you will have to regard me as a bit retarded. I should have been here much sooner. I have been sort of a stay-at-home fellow for most of my life. Better late than never. We have made most of our investments, probably 85- 90% in the United States. In recent years, we have seen more opportunities outside the US and we continue to look at the large countries like India because we need to make large commitments to make them meaningful for Berkshire Hathaway and India is a very logical place to look. So I hope I spend some money here. " He would like to invest above $ 500 million in any single transaction.

Buffett told CNBC in India: “The Indian market is growing, getting more prosperous by the day, where businesses are flourishing. This is a dream market in a sense. The number of people, the buying power that they are gaining, the ability to produce things, everything is getting better every day.”

Berkshire is prepared to invest in several enterprises in India Buffett said to 70 leading Indian entrepreneurs as well a meeting that this author attended. He is looking for majority stakes in enterprises. He announced a 100 percent owned start-up online insurance sales company in India named berkshireinsurance.com

The Blooming of Emerging Fund Managers

The early stage development of India’s private equity market disproved the hypothesis that first time fund managers cannot be successful. Accordingly major successes were achieved by first time managers such as Chrys Capital, ICICI Venture and others. Many new first time, or emerging, managers have  ventured into independent private equity firms such as Ajay Relan of  CX Partners,  PR Srinivasan of Exponentia Capital ( both had prior experience at Citi Private Equity), Red Fort Capital , Renuka Ramnath of Multiples  with prior experience at ICICI Ventures, Sandeep Aneja of the Kaizen Fund and others. More such managers, with the right repertoir of skills, will take the path of private equity spurring growth of the sector in the future.

It must be mentioned that the transaction with perhaps the highest multiple, 50X, was achieved by a local manager, UTI Ventures, which this author introduced to a major American foundation who later became one of its LPs.

Reputable LP’s from Canada, US and India have reposed faith in these first-time managers allowing them to establish funds with committed capital in the range of $ 100 million to $ 500 million. Canada Pension Plan made a $ 100 million commitment to Renuka Ramnath’s Multiples.

Indian billionaires setting up their own funds: Azim Premji’s PremjiInvest, founder Chairman NR Narayan Murthy of Infosys’s Catamaran Capital, Aditya Birla’s Private Equity Fund, Anil Ambani’s Reliance Equity Advisers and the Singh brothers’ Milestone Religare Fund.

Strong Deal Flow

Robust GDP growth in the past decade has ranged between 7 to 9 pct. Deal flow has a strong momentum and is emerging from virtually every sector of the economy.
Quality deals have high EBITDA margins, and attractive projected growth rates backed by capable entrepreneurs.

Large deals are primarily in the infrastructure space such as power, airports, roads, ports telecommunications and real estate.

Bain Capital & a Sovereign Wealth Fund have invested $ 851 million alongside the respected Brij Mohan Munjal family to acquire a stake held by Honda Motor of Japan,

Kuldip Chawla, Director, Red Fort Capital, a leading real estate fund, told the author:

“India, despite its sizeable real estate development potential is continu

ally capital constrained, increasingly so in recent years, with bank financing difficult to procure for real estate development projects, which is the only category that foreign investors can currently invest in. This capital crunch looks unlikely to change in the medium term. Accordingly, private equity is expected to be a strong source of capital.” “As debt capital markets mature over time, leveraged buyouts will also become a reality. In due course, as the Indian real estate sector opens up and matures, large global players operating at different levels in the capital stack will make India an important part of their global asset allocation.”

Deals are emerging across the full swathe of the economy including education, media, e-commerce, the auto sector, hospital services, restaurant chains, distressed companies, banks and financial services such as stock exchanges and many more areas.

Riding on the wave of consumerism, J P Morgan invested in Domino Pizza’s India Master Franchisee Jubilant Foodworks while TPG Capital  took over the distressed assets of the retail chain Vishal Retail.
One of the most successful private equity investments in India has been in a wind energy equipment company Suzlon where Citi Private Equity & Chrys Capital made very successful exits.

Enter Mega Funds

A succession of  mega funds have established offices in India and have begun to invest. These include KKR, Carlyle, Blackstone, Providence Private Equity & Apollo Capital. Henry R. Kravis and George R. Roberts, Founding Partners of KKR, said, "India is now a core part of our growing global private equity and investment platform. We believe India's compelling demographics, dynamic economy and culture of entrepreneurship will provide superior long-term investment opportunities.

 Venture Capital specialists such as Kliener Perkins Caufield & Byers and Vinod Khosla have begun investing in India.

The mega funds have a penchant for large deals in excess of $ 500 million but many of them have altered their strategies for India where they are willing  to look deals above a lower cutoff of $ 50 million. They are also not limited to buyouts and are investing in growth opportunities.

The Pool of Entrepreneurs

Entrepreneurs in India have embraced private equity as a vital tool in realizing their business ambitions. Private equity funds are viewed not only as a source of funds but also as advocates of good corporate governance.

Recent reforms have made the enabling environment for entrepreneurs even better. Highly educated Indians living abroad have returned to try their luck and pursue the Indian business dream.

Good examples are Dhruv Shringi-led Yatra.com & Deep Kalra’s MakeMyTrip.com (MMT) online travel platforms where California VC firms like Valiant Capital Management, Norwest Venture Partners (NVP) and Intel Capital have invested in Yatra.com . Helion Ventures, Sierra Ventures SB Asia Infrastructure Fund (SAIF) invested in MMT.

Goldman Sachs, with the Indian School of Business (ISB), is training budding women entrepreneurs who are already on the job. This is part of Goldman’s global initiative called “ 10, 000 Women Entrepreneurs” for which Goldman has dedicated $ 100 million worldwide  for the effort.

At ISB, Goldman Chairman Lloyd Blankfein said  “Entrepreneurial drive is the engine of markets. It breaks conventions. It forges opportunities. And, it fosters growth.” He also mentioned that the ISB has been a leading cultivator of entrepreneurship in India and throughout Asia. “Through dedicated resources like the Alum Entrepreneurship Showcase and the Wadhwani Centre for Entrepreneurial Development, the ISB makes tremendous contributions to the Indian economy,” he added.

The Indus Entrepreneurs (TIE) is making heroic efforts globally to promote budding Indian entrepreneurs at locations in the US, UK, New Delhi, Bangalore and other centers.

Eco-System

An entire eco-system supporting entrepreneurship has emerged. These include angel organizations such as the Indian Angel Network & Mumbai Angels. A George Soros invested fund is supporting budding entrepreneurs.

The Advent of Buyouts

Sanjay Nayar, the CEO of KKR in response to a query from the author said:
“The prevalence of buyouts will increase as:

  1. Ownership of companies becomes widely held by the public with professional managers being distinct from the company owners.
  2. Generational transitions when the new generation no longer wants to be involved in the business
  3. Reform in regulations allowing for debt financing of acquisitions.
  4. Pressure on conglomerates to fully divest non-core assets.

“Until then, buyouts will be more the exception than the rule and will largely be limited to opportunistic acquisitions of small businesses. All of KKR's India investments have been minority growth capital investments, except for our first Indian investment - Aricent - which was a buyout under exceptional circumstances as it was fully owned by an overseas publicly traded MNC.”

In the pre-2000 era, there was an absence of buyouts and many acquisitions were considered hostile. The control premium associated with these deals is an incentive for entrepreneurs. KKR did a $ 1 billion buyout of Aricent, a Gurgaon, New Delhi based firm previously known as Flextronics Software Systems Ltd. The sellers are either retained to run the business or start another venture becoming serial entrepreneurs.

Sanjay Nayar of KKR also stresses the importance of operating partners. In the early 2000s, low-hanging fruit did not require so much value-add. Going forward, as markets become more complex, expert operating partners will play a vital role in India’s buyout and private equity industry. In this context it is heartening to see managers like Sanjay Nayar giving up their steady jobs abroad, or in India, and taking on the private equity operating partner mantle.

Multitude of Exit Options

Another feature encouraging more private equity to enter India are the multitude of exit options. Until a few years ago the majority of exits were in the form of IPOs. A range of exit options have now been successfully tested in many transactions. These include,besides IPOs, buybacks, strategic sales, and mergers and acquisitions with Indian or foreign buyers. Warburg Pincus was able to successfully make a nearly $2 billion exit from its investment in Bharti Airtel by successfully employing  a bouquet of multiple exit routes.

Strategic Investors

The attractions of India have caught the attention of American, European and Japanese strategic investors.

These are high quality leaders such as Pearson the owner of the Financial Times newspaper. It recently acquired an education services company, TutorVista, providing an exit to private equity investors, and publicly announced that it will be making more acquisitions in India.

Another example is the $ 600 million sale of Paras Pharmaceuticals by Actis, a buyout fund, to Reckitt Benckiser which is a global force in household, health and personal care, delivering solutions to consumers.

Conclusion

Fund managers have endeared themselves to entrepreneurs in India by being accessible  at various events in the country and by funding a wide range of exciting  new or established , large or small ventures.

Rapid GDP growth, strong deal flow across multiple sectors, home grown or internationally educated professional entrepreneurs, mature  offshore and domestic fund managers as well as emerging managers  and operating partners with the ability to add value, a wide array of proven exit routes including IPOs & mergers & acquisitions, strong interest of strategic investors and the entry of mega funds- all augur well for a sound private equity industry in India.

About the Author

Arvind P. MathurARVIND P. MATHUR
Chairman, Private Equity Pro Partners

Arvind P. Mathur   Arvind P. Mathur, CFA, FRM, has held a variety of positions, including Head, Capital Markets at the Asian Development Bank and Senior Adviser, Citi. Arvind is Chairman, Private Equity Pro Partners . a new venture that he has recently begun.

Recently, Arvind played a role in the creation, structuring and placement of a nearly $ 1 billion India Infrastructure Fund. In addition Arvind was instrumental in the establishment of the Asian Infrastructure Fund ($780 million), the Asian Infrastructure Mezzanine Capital Fund ($265 million), The Asian Equity Infrastructure Fund ($400 million), Infrastructure Development Finance Company (IDFC), and the AIG Sectoral Equity Fund ($110 million).

He has helped structure, and invested in, over 30 private equity funds, including 5 infrastructure funds and a number of General Partnerships. While at ADB, Citi and Standard Chartered Bank, Arvind gained exposure to equity investments and lending.

Arvind's experience encompasses both fund and direct investing in the emerging markets of Asia.
He has been a member of Investment Committees and fund boards. The funds have targeted investments in India & China besides several other emerging markets of Asia.

He has worked on funds with Limited Partners such as the Asian Development Bank, the International Finance Corporation (IFC), CalPERS, La Caisse de Depot et Placement du Quebec, the Prudential Insurance Corporation of America and some of the leading institutional investors in Australia, Singapore, Malaysia and India.

Arvind has promoted the theme of corporate governance in many of these funds, particularly those involving CalPERS. He has authored a number of articles on corporate governance.

In his 33 year experience, Arvind has undergone a variety of training including investment banking at Goldman Sachs & Citi in New York and in capital market regulation at the US Securities & Exchange Commission.

Arvind has attended short management courses of the Columbia Business School and that of Cornell University besides an investment management workshop at the Harvard Business School.