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40

private equity international

december/januar y

2010/11

e m e rg i n g m a r ke t s : i n d i a

Coming of age
The Indian private equity market is changing: more funds, more strategies and more sector
specialists. Will it work? asks Siddharth Poddar
The total value of Indian private equity
investment has bounced back in 2010,
suggesting that much of the financial
crisis-related has dissipated. In the first
10 months of 2010, private equity firms
have already invested $6.84 billion, more
than double the amount invested in the
corresponding period last year, according
to Venture Intelligence, an Indian private
equity-focused research service.
The Indian stock market has rallied
almost 20 percent since the beginning of
the year and the Bombay Stock Exchange
benchmark Sensex reached an all-time high
close at 20,893.57 on 4 November, another
sign of increasing investor confidence.
Through all of this, there have been
changes afoot in the Indian private equity
industry and these relate to the size of
deals, an emerging segmentation in the
market and GPs attempts at specialisation.
higher stakes

Anand Sunderji, senior advisor to Londonbased SB Capital Partners, an investment

boutique that works with family offices

As an LP, I feel we
can now construct
a portfolio in India,
whereas earlier, we
were just going after
the best manager

and other institutions in private equity,

underlines why it is still difficult to do
control transactions in India. The first
reason is that entrepreneurs do not want
to lose control over businesses they own.
Secondly, many Indian private equity firms
do not have the skill sets necessary to run
and operate a company. Additionally, the
lack of leverage in India inhibits large
buyout transactions, he says.
Given the strong growth outlook
across multiple sectors in India in
the medium term, making minority investments in family-owned and

entrepreneur-led businesses will continue to be the viable operating model,

says Srinivas Chidambaram, managing
director and CEO of Jacob Ballas Capital India, a New Delhi-based manager
with more than $600 million under
management. The best enterprises fall
into this category, he says, and in the
absence of any distress or succession
issues, there is no economic driver for
the best companies in India to surrender shareholding control.
However, the number of control transactions will increase,
Chidambaram says, although they will
not make up more than 10 percent to
20 percent of the market opportunity
in the next five years. My view is that
buyouts and control situations will see
a strong emergence, possibly in five
to 10 years once growth slows down,
some bumps are hit along the economys
growth cycle and founders of businesses
start to exit.
Anubha Shrivastava, a managing
director and head of the Asian portfolio at UK government-backed CDC

december/januar y

2010/11

private equity international

Group, says private equity managers that

were taking minority stakes before the
recession are now trying as far as possible to get significantly larger minority
stakes in companies and where possible control stakes. This is because,
as the recession hit, a number of companies were not performing and there
were disagreements between the private
equity fund managers and the owners.
Fund managers realised they were not
as influential as they would have liked
to be, she says.
Singapore-based Sunil Mishra, a principal with fund of funds manager Adams
Street Partners, agrees that Indian financial sponsors are now looking for larger
stakes and that while some GPs have
now raised buyout rather than growth
capital funds, others are pursuing buyouts on a more opportunistic basis. As a
result, the Indian market is witnessing a
greater number of investments of more
than $100 million size, even if they are
not outright buyouts.
rise of the specialists

In recent months, a number of sector-specific funds have emerged in India, targeting

sectors such as healthcare, education and
most commonly infrastructure. There is

page

We are seeing people

venture outside of
their comfort zones,
and that is good

a view, however, that the market is not yet

ready for funds focused on only a particular sector. Both Adams Streets Mishra and
Low Han Seng, executive director and head
of the private equity fund of funds business at Singapore-based United Overseas
Bank, do not think the Indian market has
enough depth yet to justify sector-focused
funds. For one thing, says Low, these areas
of specialisation for example, education,
hospitals and retail tend to be quite well
recognised by the industry at large, meaning
many sector-agnostic funds participate in
these sectors as well.
According to Khan, funds focused on
single sectors will evolve, but they need to
ensure that investment discipline and judgement is not compromised when the sector

41

gets too frothy, something Low alludes to

as well, when he says the advantage of a
sector-agnostic fund is its ability to switch
sectors if a sector becomes too hot, whilst
a specialised fund cannot... and sectors do
get hot very quickly in Asia.
Mishra is not convinced there is any
sector in India apart from infrastructure that can offer 10 to 15 high quality
transactions over a three to four year period
for a manager to structure a portfolio on
an ongoing basis. Infrastructure is the one
sector in which Adams Street is looking at
specialist funds, as it is the only one which
has shown itself to be relevant and effective, he says.
The most interesting part is that the
few people who have made money in the
Indian private equity industry are all still
sector-agnostic that tells you something,
says Mishra.
Rather than tie themselves to any one
sector, other funds are focusing on broader
investment theses. Shujaat Khan, cofounder and managing director of Mumbaibased Blue River Capital, which will be in
the market for its next fund in early 2011,
says his firm is now aligning its strategy
with broader target mega-themes, namely
financial inclusion, consumer spending and
infrastructure development.
fund supermarket

14000

350

12000

300

10000

250

8000

200

6000

150

4000

100

2000

50

2004

2005

2006

2007

2008

2009

2010

Amount $m (all sectors)

YTD
Number of deals (all sectors)

Amount $m (Infrastructures share)

Number of deals (Infrastructures share)

Source: Venture Intelligence

Number of deals

Amount $m

t h e p ro m i n e n c e o f i n f ra s t r u c t u re

By some estimates, there are now more

than 400 private equity fund managers
in India today. And new funds continue
to be launched each month. However,
United Overseas Banks Low says that
while quantity has increased, quality
remains hard to find. In spite of the large
number of funds, he says, many overseas
institutional investors have only five to
10 relationships and have great difficulty
finding quality teams to add to this list.
Sunderji talks about a number of
senior professionals starting their own
firms. We are seeing people with track
records of 10 to 15 years doing their own
thing, but we are not seeing differentiated products, he adds.
He does, however, say that India is
seeing a new breed of managers in the
form of funds that are being launched
by prominent Indian business families.

page

42

While these may be subject to some

of the complications associated with
being a captive investo, there are clear
benefits. These families can bring a lot
to the portfolio companies they can
bring business and contacts, he says.
In a further development, fund
managers have started to invest in the
central and eastern parts of India, areas
that have traditionally not drawn considerable interest. Firms are venturing outside of their comfort zones in
search of higher returns away from the
highly competitive markets of Delhi
and Mumbai, which is good, Shrivastava says.
Mishra is also pleased with the way
the industry is developing in terms of
scope. At one point in time, all the
funds in India were pretty much the
same size, he says. Today, however,
there is a distinct small end, mid-end
and large end, giving LPs more choices.

private equity international

december/januar y

p o t e n t i a l p i t fa l l s

A by-product of the expanding market,

could well be instability within teams,
says Sunderji. With the arrival of international firms and new funds emerging
all the time, What is it that is going
to keep these [teams] together, especially in an economy that is changing
so rapidly and so many opportunities
arise for professionals? Sunderji asks,
recounting a recent anecdote in which
someone had switched roles for salary
jump of three times.
The proliferation of more funds and
firms is also causing concern that too
many GPs have been able to raise money
without necessarily having the right credentials. In Lows view, this could lead
to a decline in overall industry returns.
Thus far, every man and his dog was
trying to raise a fund on the back of
a very limited track record, he says.

2010/11

From here on, there will be a premium

for deal sourcing and value creation.
Teams with insufficient resources will
find themselves being marginalised. I
think that the days of a GP consisting
of two men and a dog are fast coming
to an end, Low says.
Consolidation is a recurring theme
among market participants. While LP
interest in India is likely to remain
strong, investors feel there will be a
number of managers who will not be
able to raise money for follow on funds.
Private equity in India is entering
a phase of greater differentiation and
segmentation, albeit still within the
paradigm of growth capital investing. The biggest development in the
market is best summed up by Mishra,
who says: As an LP, I feel we can now
construct a portfolio in India, whereas
earlier, we were just going after the best
manager. n

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