There is a lot of supply of paper in the market. Do you think that it will have a crowding- out effect and suck money from the secondary market?
This, coupled with the fact that there are so many profitable companies in the public sector, makes me see a lot of supply. I think that supply of paper is good and it will absorb liquidity. Indian stocks are trading at multiples of 17 to 18 times, when you look forward. Typically, this is a smart way to show a more conservative picture than what it actually is. The way to look at multiples is to look at what has been delivered and then you also see future growth, but when you look at 17 or 18 for the next year, you already assume that that growth has happened and we can?t compare it to another country?s multiple where they are looking at trailing. So if you look at 23-24-25 times, the growth in India is lower than in China. I find this after talks with investors in funds like ours, or with those who are investing in funds which can invest in India and China. They find it very difficult to justify to their investment committees that investment in an Indian company, where the multiple is higher than in China and where the growth rate of the economy has been lower and is expected to be lower. Even if you see $15 billion or $20 billion of issuance each year for the next three or four years, I don?t see a crowding-out happening. New issuances don?t always lead to a crowding-out.
Moreover, it is important to look at what has changed in the last six months in India. A government was sworn in and at that time there was a big increase in confidence. But since then, not much has happened. So that one event was a little bit of a game changer but I am not sure if that implies a 60-80 % increase in the stock prices of most of the companies. If it is driven by liquidity, then that liquidity which is there today can very easily evaporate tomorrow. It makes for a kind of risky situation where the price level gets determined, in a big way, just by foreign money coming in or going out.
What challenges do corporates face in terms of funding?
One of the factors that corporates face when they are raising fund is their own expectation or valuation. Higher valuations not only impede deals but also hurt companies as they are out priced in the funds market. They may not have good disclosure norms and governance is also an issue. Businesses which have good governance will find buyers at a price. The valuation can go up and down, according to the market. I find that there are only certain times in history when liquidity dries up, which it did recently, and then you have a great opportunity to buy; provided somebody needs the money urgently otherwise businesses just sit it out. Also, there is concern whether the aftermath of the global credit crises is truly behind us, and this is impacting confidence levels.
After the 2008 crisis, PE deals have almost dried up because companies are not getting their valuations and buyers are offering different valuations. Now it is exactly the opposite. Do you think valuation will be a challenge for deal making?
Private equity funds found it difficult to conduct deals on the way down. Private equity seekers take their cue from public markets for valuation, when they are looking to raise money. In general terms there should be a discount for illiquidity, otherwise, the company might as well be listed and there are more disclosures and more regulations from Sebi? which will be applicable?which the companies have to comply with. But there are certain advantages of not listing. We found that people were expecting valuations which were similar to the market but on the way down, the contention was that this is temporary. There was a time when you could buy a stock which was listed cheaper than comparable companies in private hands. That made private equity deals difficult. On the way back up, of course, everybody wants to ride the bandwagon. So people would want the same price, using multiples or any other benchmark which is available for listed companies. PE deals happen when companies want to stay private or when they are of a size in which listing is not appropriate, or for other similar reasons. At today?s valuations, PE deals would happen easily if somebody is willing to pay the price of a comparable company which is trading in the market, but many PE investors, including us, sometimes find that valuations are high. In such cases, deals do not happen. The timing is very difficult but it determines the return in the business. So yes, there been an uptake in the PE business.
Recently some of the PE firms have raised money entirely from the domestic markets. Do you think this is a trend reversal, since earlier we tapped overseas markets?
If that is the case, I would say that it is a very good change if the domestic market opens up for private equity because it is a good instrument. It meets a need in most economies for certain types of investment and it has a place. As opposed to the public market, it has certain other characteristics like a longer term and it?s not liquid and traditionally it has yielded higher returns. For the higher return, you have to pay the price in terms of less liquidity and PE worldwide has been funded more by institutions than by individuals. I think it is high time Indian institutions started looking at PE more seriously but I think the role of international investors in PE in India is not going to be reduced because Indian institutions have too much liquidity to invest in PE. Additionally, there are regulations which make it a tricky decision for banks to invest a lot in PE. Having said so, there is a crying need for Indian pension money to get the ability to flow into private equity funds.
Recently, Sebi has proposed its SME exchange. Once this becomes fully operational, do you think PE and venture capital deals will come down?
The role of friends and family in startup situations is evident around the world and is here to stay. There is a view that Indian companies go to the market a little too early when they are still small. They may not have the stability or the processes which investors would want to see in them when they are looking for fund raising from capital market. They have to comply with Sebi regulations, accounts have to be audited more often, disclosures have to be made, the need for independent directors and other such things come into play. When such small companies are allowed to go to a platform such as the SME exchange, questions such as how will they be able to raise money, how much liquidity will be there in their shares and most importantly access to information on those companies performance to form an opinion will be a concern.
Not every brokerage has the staff to cover more than 20 or 30 or 50 stocks. Even the bigger players like JMM, DSP or Edelweiss don?t cover all the stocks that are listed on the main exchanges. So, who is going to cover all the smaller players and how will you or I, as an individual investor, or even as an institution, make a decision? I would actually like to observe the success of this platform. If it takes off then it should give a reason for venture capitalists to invest in those companies at an earlier stage in a smaller amount because they will be having one more avenue for exit. Private equity funds invest with a limited horizon to get the money back, unlike a promoter who stays in for a longer time.
So will this not retard the growth of PE?
No, I think it could actually support it. Though we still have to see the success of this platform.
How do you see the dollar rupee volatility impacting the market?
It?s the inflow/outflow of capital in India which really drives the dollar rupee exchange rate many times. That is something which our policy makers should be worried about. We are perhaps the fourth-largest economy in the world by way of PPP (purchasing power parity) and if we have our exchange rate decided by some large foreign institutional investor (or investors) who decides to enter the market and have a portfolio investment?that should be a reason for us to think how such inflows should be absorbed and there should be a mechanism to temper the impact of such market swings! It?s an outsized thing. I think there is an impact of the FII investment on the dollar rupee exchange rate. If there is an appreciation in the rupee exchange rate, it allows FIIs to make money when stock prices don?t go anywhere but when people start pulling out, the opposite happens. So it will allow you to make money as long as you are the early player to play on that trend!
