Private equity, public good: Of Valeriepieris circle and the new El Dorado

October 31, 2020 5:45 AM

Having directed domestic investors and early-stage funds, govts are now looking to PE to fund their next leap. This is palpable at forums like Davos, and in some welcoming policies at the state and central govt levels

PE/VC funding has been a major source of FDI for India over the last two decades, providing $194 bn from 2010 to 2019 per IVCA-EY data, the bulk of it has been received from 2017 to 2019, across infrastructure, financial services and real estate sectors.PE/VC funding has been a major source of FDI for India over the last two decades, providing $194 bn from 2010 to 2019 per IVCA-EY data, the bulk of it has been received from 2017 to 2019, across infrastructure, financial services and real estate sectors.

By Sripriya Menon

The Valeriepieris circle is fascinating. A 2,500-mile radius centred in Myanmar covers less than 10% of the world’s area but is home to 50% of the world’s population. This circle houses many of the world’s fastest-growing economies like India, China, Vietnam and Bangladesh.

Factors leading to Europe’s economic renaissance, or those witnessed by the US in the early 20th century are seen rapidly bubbling up within this circle.

Assertive governments, bold geopolitical stances, an impetus to domestic production, growth of technological and financial ecosystems (reducing dependence on financial “superpowers”), and an unprecedented upsurge in consumption patterns.

The pandemic has paradoxically made this region more attractive, due to reduced valuations, and the emergence of new sectors and investment themes.
In short, the Valeriepieris circle is the new El Dorado.

Beyond “Carpe Diem, baby!”
From humble beginnings in the global financial landscape of the 1980s focussed on leveraged buyouts of the US companies (remember Barbarians At the Gate?), followed by expansion and diversification to global alternative asset management in the 1990s, emerging into public consciousness in the 2000s, and shifting gears to value creation and impact investing in the 2010s, the private equity (PE) industry has disrupted financial and commercial ecosystems globally, with over $4 trillion in assets under management (AuM) and abundant dry powder (un-invested capital) of $1.45 trillion in June, as per Preqin data.

Diverse offerings, expertise to turn companies around, large fund sizes ($25 bn Blackstone 2019, $24.7 bn Apollo Global Management 2017), supportive political climate, and openness of businesses in this region to these funds, promises a sustained upward trajectory for the industry.

The Asia story—Adventure is out there!
Preqin/BCG data indicates robust growth in the last five years where AuM for APAC-focused funds grew at an annual rate of 31% from 2015 with $411 bn through 2019 to $1,219 bn, versus 12% for funds focused on North America and Europe during the same time period, increasing APAC’s share of the global industry from 17% in 2015 to 28% in 2019.

PE markets in Asia are heterogeneous with different classes of investors operating. State-owned investment firms GIC, Temasek in Singapore and Khazanah in Malaysia are increasingly active in cross-border investments participating in 12% of all deals by value in APAC, largely concentrated towards India. Corporate venture capital funds are active in China (Alibaba, Tencent, Baidu) and Japan, investing heavily in start-ups and high-growth companies. South Korea’s strong regional funds, Affinity, IMM, and MBK, and domestic funds make 66% of the deals by value in 2019. India is dominated by global funds, including large state-owned investment firms, comprising more than 81% of deals, by value, in 2019.

The India story—Look beyond what you see
PE/VC funding has been a major source of FDI for India over the last two decades, providing $194 bn from 2010 to 2019 per IVCA-EY data, the bulk of it has been received from 2017 to 2019, across infrastructure, financial services and real estate sectors. The real estate industry witnessed a significant shift with more structured financing, private capital and public offerings; the country’s first Real Estate Investment Trust (REIT) backed by the US PE major Blackstone listed in April 2019.

January-September witnessed a pandemic induced dip (53% y-o-y) to $17.2 bn. Capital distribution was reflective of evolving consumer behaviours, with increased adoption of technology-driven solutions for work, leisure and health. Investments were mainly in pharma, telecommunications, and technology. Byju’s is now the world’s most valuable ed-tech company with a valuation of $10 bn. Further, PM Modi’s call to make “AI for All” in India augurs well.

To thine own self, be true
The PE industry is poised to grow exponentially. It is not a question of if, but when and by how much. Having directed domestic investors and early-stage funds, governments are now looking to PE to fund their next leap. This is palpable at forums like Davos, and in some welcoming policies at the state and central government levels. FM Nirmala Sitharaman has called for investments across all sectors of the Indian economy at the recent US-India Strategic Partnership Forum. The PE industry needs to take a bigger geographic leap and continue to disrupt. While adept at reconstructing other industries, there is an opportunity to reconstruct itself, from within. Collaborative teams, transformational capabilities within the firm and across portfolio companies, operational capabilities, and technology will be key levers. A culture of innovation, active risk/controls management, and a dogged determination towards becoming better, will be the differentiators.

Seldom does a win-win-win opportunity present itself for the trinity of nations, domestic enterprises and foreign investors alike. Neither can leap without the other. Like with most things in life, it is mostly about wanting to take that leap.

Author is a financial industry expert with experience in The World Bank, Deutsche Bank & Credit Suisse. Views are personal

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