For cash rich private equity funds like Carlyle India Advisors, the country has the right recipe to invest cheap ? low valuation of companies in a slowing economy, credit tighter for firms to expand and a volatile stock market denying companies to raise growth capital.
?From an investment point of view, we think there are now very good pockets of value deals emerging, which is what our recent investment in India Infoline reflects,? said Devinjit Singh, MD at Carlyle India Advisors. The fund, with globally manages $153 billion, invests from its $2.5 billion Asia focused fund, of which 60% has been invested.
The fund?s investment portfolio is thin as it chose to stay in the sidelines for right opportunities, unlike its rivals who purchased slices of many companies. In 2007, Carlyle paid $650 million to purchase a 5.6% stake in India?s largest mortgage lender HDFC at R1,730 a share. ?It?s the right time for investment opportunities for a long-term investor,? said Singh, who took over as managing director in 2008 from ace investment banker Rajeev Gupta, who left to start his own advisory business. Some PEs agree with Singh.
?With the markets being where they are now, the valuations are becoming attractive and we have had some PIPE transactions as well,? said Mayank Rastogi, partner, private equity and transaction advisory services at audit and consultancy firm Ernst & Young.
Carlyle buy out fund, which started to purchase companies lock, stock and barrel, restructure it and later sell it at a profit, has changed its strategy by acquiring minority stake in companies and is looking at companies that drive India?s consumption.
This year in October, it bought stake in two brokerages ? a 9% stake in India Infoline and in November, 5.48% in Edelweiss Financial Services. HDFC shares are trading at less than half the price at R673.7 a piece on Wednesday on the BSE.
?IIFL did not need capital at present and had bought back stocks through a buyback earlier in the year but we were happy to be invited by them on the board to add some value to the company,? said Singh. But, some PEs find it tough to buy significant stake from public market. ?The rider though is that a lot of listed companies do not have enough free floating stock or velocity and hence it is difficult for PE funds to pick up meaningful stakes during a day?s trade unless you find a counter party which is willing to do a block deal,? said Rastogi of E&Y. ?Also, most of these block deals are pre-identified and agreed.?
Carlyle says good firms are still holding on to their stake because they feel the falling valuations are not justified. ?There are often situations where a lot of good companies, if they feel valuations are depressed, don?t want to sell assets or equity and that becomes a challenge in times like these,? said Singh.
Consultants agree with Singh. ?Unless there is a desperate need to raise capital or because of some family need or dispute, 70-80% of the Indian companies will wait for the right opportunity to raise funds,? said Sanjeev Krishnan, executive director at consultancy and audit firm PricewaterhouseCoopers.
But Carlyle is looking ahead to invest in healthcare, but is yet to hit the right candidates. Retail is way too far to invest as it has a long gestation period and requires the right partner.
Carlyle is not in a hurry to raise money even as Indian companies are attractive now to invest.?There is going to be a shakeout in the PE world as well,? said Singh. ?For funds that have not generated returns, to raise new funds is going to become tougher. There are a lot of the funds on the road, but I doubt whether they will be able to raise the money that they were looking for,? he added.
The fund has its concerns too. High inflation and interest rates had tapered off investments in the past 1-2 years. ?Even if Europe sorts itself out, our fundamental issues like inflation, supply side constraints, interest rates and slowdown in investments will remain a concern,? said Singh. ?What people are willing to pay in terms of valuations has become lot more disciplined than before.?
