Opportunity in adversity

Despite chaos in world markets, participants at PEI's inaugural India Forum in Mumbai argued that the asset class would not only weather the storm, but emerge stronger.

If the prevailing mood at the inaugural Private Equity International India Forum 2008 in Mumbai was anything to go by, turmoil in financial markets across the world has not deterred Indian GPs. Talk at the event centred on making the most of the opportunities presented by changing times.

The meeting was co-hosted with the India Venture Capital Association and Emerging Markets Private Equity Association (EMPEA) and was sponsored by ICICI Venture, IDFC, IL&FS, Sage Capital, Dubai International Capital and law firms Clifford Chance, SJ Berwin, Akin Gump and Nishith Desai. They were joined by exhibitors KPMG and Investment Café.

Although fund managers acknowledged a slowdown in deal flow – in part because over-inflated asset prices still had further to adjust – the presence of dry powder in many firms' coffers was a cause for optimism. Those managers needing fresh capital were less sanguine. Limited partners affected by the financial crisis have seen their allocation models dislocated by the slump in public equity values and may not be in a position to commit much more to the asset class in the short term.

Limited partners, including Hugh Dyus of Macquarie Funds Group and Mark Delaney of Australian Super, were generally pleased with the returns generated by the India-focussed funds in their portfolios. Perhaps more importantly, LPs were confident that even given current market conditions, these managers will still be able to deliver meaningful returns.

One firm hoping to do just that is Dubai International Capital, which has grown its operations to make investments in India.

Anand Krishnan, the firm's chief operating officer, told the gathering that though economic decoupling was a myth and markets such as India were affected to an extent by what is happening elsewhere, DIC was still eager to pursue investments in the country.

Speakers from The Carlyle Group and 3i among others declared that the operating environment was not paralysed compared with other markets, and that the relative immaturity of the private equity industry was a factor. It was also noted that the capital markets in India are still in comparatively good shape. Many GPs credited Indian regulators for employing policies that have ensured the global financial crisis hasn't hit India as badly as other countries. Several banks applauded the prudent and practical approach of the Reserve Bank of India.

Thus far, the tightness in regulations has worked very well, confirmed Renuka Ramnath, managing director and chief executive of ICICI Venture (see also p. 24). However, she also said now was the time for regulators to steadily liberalise so that the country could deliver its full potential.

As leading GPs took to the stage to discuss investment opportunities, it became clear that the deal environment was changing – and not for the worse. The unavailability of leverage for transactions due to regulatory controls has obliged many private equity firms to make minority, growth capital investments. In the past this source of capital seemed an expensive option for companies in comparison to plain vanilla bank debt or a local stock market listing. Today's environment has changed perceptions though, with capital-hungry corporations now being far more receptive to financial investors.

As Ajay Relan, the founder of Delhi-based CX Partners, said during a panel discussion: “Private equity in India in the last two to three years was not differentiated enough from other means of capital funding. However, now private equity firms can distinguish themselves from other sources of capital that have dried up. This is a different economy.”

But no-one was under any illusion that the changing dynamics in Indian markets will trigger the development of a fully fledged buyout culture any time soon. Besides the absence of leverage, another factor limiting the number of control deals is that so many Indian companies are still in growth mode, and their owners are content to carry on riding the economic wave. Growth capital and expansion finance are therefore the investments of choice for the foreseeable future.

Private investment in public equities (PIPEs) now account for a significant portion of private equity capital deployed in the Indian market. Until recently, many GP groups bought into deeply illiquid stocks and rode a resurgent index to deliver meaningful returns. In 2007, almost a third of all private equity investments in India were PIPE deals.

Though Indian shares have lost about 50 percent of their value this year, putting a number of fund managers in an uncomfortable position as they mark-to-market, participants still argued that PIPEs remained a credible investment proposition over the long term. The fact that many listed companies are rarely traded, cannot source further capital via rights issues, yet have the potential to grow with the input of private capital, underlines the potential.

Although the word “cautious” recurred in many presentations, it was a mood of optimism that prevailed. Luis Miranda, president and chief executive of IDFC Private Equity in Mumbai , even described India as becoming “the centre of the universe” for private equity. His comment was made in jest. But the confidence among those present was palpable.