Pawan Singh, MD, India and Southeast Asia at Bain Capital, believes that while public markets have seen the first wave of capital coming back to India, from a private equity perspective it may take longer to see new fund commitments and India allocations to increase. In an interview with Nitin Shrivastava, Singh said that though Bain Capital in India has deployed capital across fewer deals compared to peers, their approach is to partner closely with great management teams and entrepreneurs to drive the biggest value levers in the business. Excerpts

What do you make out of current market valuations? Are they becoming a deterrent to higher PE deal flows?

Just look at the public markets, they are trading slightly ahead of long-term multiples but well below past peaks. However, they have risen a lot in a short period of time. Anytime that happens, there will be a period of adjustment and recalibration. In addition, while value expectations have risen, the actual operating performance of companies will take some time to catch up. This disconnect will make deal-making harder in the near term.

Higher PE deal flows are not only a function of valuations, but also dependent on primary capital raising by companies for fresh capex and expansion. As primary capital raising revives on the back of capex cycle, one should see more PE activity.

Bain Capital in India doesn’t have large exposure in terms of the number of companies.

In terms of capital invested, we are among the top PE investors, having deployed more than $1.5 billion in equity. But this capital has been deployed across fewer deals than some of our peers. There are a couple of reasons for that. First, we believe you have to be very patient and disciplined when investing in India. While it’s a large and growing economy, the PE market has been challenging and so it’s difficult to be prolific. Second, given our portfolio engagement model, we like to do fewer deals, but then really invest in working with those companies.

What has been the strategy for making investments in India?

Our investment approach is to partner with market-leading companies and management teams, and then work with them to accelerate growth and performance. We have the same approach here.

In terms of ‘themes’, they tend to be more dynamic. For example, one theme is investing in companies with a natural currency hedge. Given the sharp rupee depreciation in the last few years, many investors have pursued export-oriented sectors like IT and healthcare. One theme that is seeing more play today, especially in the public markets, is investing in cyclicals like manufacturing and industrial companies that will benefit from the upturn in the capex cycle.

Another theme is specific shareholder situations. For example, it could be companies where either the promoter family or sponsor are looking for an exit, companies where we can facilitate consolidation of shareholding by helping one set of shareholders to acquire the other, or those companies where there is balance sheet stress leading to restructuring or sale of assets.

How about investing in distressed companies or assets?

While there has been some activity in this space, it has been more limited to corporate acquisitions rather than PE, and to sale of assets by distressed groups than purchase of truly distressed assets. Also, banks or financial lenders have not been that aggressive in forcing companies to de-lever or restructure, which has muted overall deal activity in this space.

Buying good companies or assets from distressed groups could be an interesting opportunity for PEs and hopefully we will see more activity there.

You do not have consumer-oriented companies in your portfolio in India.

We would love to invest in consumer businesses. Consumer and retail is one of our top three verticals globally where we have invested in companies such as Dunkin’ Donuts, Domino’s Pizza, Burger King, Toys R Us and many others. One of the bigger challenges on the retail side in India is the FDI regulation prohibiting direct multi-brand retail investments. On the consumer side, the challenge is these companies are often cash-rich and hence do not need primary capital. Also, these companies get valued relative to publicly-listed firms that trade at high multiples and so are expensive for PE investors.

How do you see PE investment trends over the next 1-2 years?

The macro indicators — that were on a declining trend for a long period of time — have definitely stabilised. The leading indicator on investor sentiment has clearly been the public markets which saw the first wave of capital coming back to India. From a PE perspective, I think it will take longer to see new fund commitments and for allocations for India to increase. Assuming the macro trajectory continues to improve, which hopefully it will, I believe you will see PE activity pick up in the next 6-18 months.