The past (2001–2007): The Indian private equity (PE) market started with a lot of promise in early 2000, with several successful investments in the succeeding years. However, with interest levels of global investors peaking in 2005-06 and the resultant capital overhang, the legacy of Indian PE hasn’t been particularly glorious. The Indian market was plagued by a plethora of PE funds with lot of dry powder, resulting in too much capital chasing too few “quality” companies. The market has been highly intermediated which, when combined with the dynamic of large amount of capital and few quality companies, resulted in high entry valuations and made it difficult to generate desired returns. Additionally, the bulk of PE deals in India were passive financial investments for minority stakes and hence, the general partners (GPs) had limited influence on the operations of their portfolio as well as creating an exit. In addition, given the infancy of the industry in India, most of the talent had limited long-term investing track-record, which also contributed to a top-down approach. As a result, Indian GPs have returned just about 40% of the total capital invested during the 2001-07 vintage.
The apocalypse (2008–2013): The Indian PE industry witnessed structural changes from early 2009, which continued till recently. With a history of poor performance, most global funds increasingly became dormant in India, whereas Indian GPs struggled to raise their first or follow-on funds. Given a combination of rich multiples paid in the past and the IPO market drying up, most firms found it difficult to secure exits. The performance pressures were further exacerbated by the rupee depreciation of ~40% against the dollar, further eroding the already sub par returns. The ensuing Darwinian consolidation led to a visible reduction in the competitive intensity, with very few funds participating in this investment cycle.
The promise (2014-19): India’s macro benefited with the new government elected in 2014, combined with benign oil and commodity prices. The NDA government re-initiated the reform agenda. Sustained low prices of crude oil and global commodities helped tackle India’s current account and budget deficits, and have provided the government the necessary funds to invest in infrastructure and have helped decrease the inflation rate. This allowed the central bank to initiate rate-cuts and kick-start investment. Challenges in the other emerging markets (China, Brazil, Russia) have allowed India to become “relatively” more attractive for foreign capital.
Select GPs have started differentiating themselves through focused strategies (e.g., control deals) and sector selection (healthcare, etc) and, in few cases, successful track-records. In addition, home-grown GPs, with local decision-making facilitating quick movement, and competitive positioning in the mid-market deals, became very relevant in the Indian market.
Even as these structural and macro changes were underway, the Indian PE industry’s performance bounced back in year 2015. Buoyant capital markets helped PE funds record a five-year high of exits worth ~$5.2 billion in the first 6 months of 2015, as compared to ~$4.2 billion for all of 2014. Investments also boomed to $13.8 billion in the first 3 quarters of 2015. Besides the upcycle in the investments, India PE also witnessed the willingness to underwrite deals with different risk-reward trade-offs. Instead of just backing mature business models, the Indian market saw GPs willing to take exposure in companies with evolving business models, especially in the consumer technology space. This was primarily driven by bulging cheque sizes and valuations of such companies and increased global interest in the sector.
The Indian promoter’s thought process has also matured considerably, i.e., in terms of being more open-minded on ceding control, thanks to succession challenges, over-leveraged balance-sheets, etc. The Indian promoter—PE relationship also has evolved significantly. While, till a few years ago, promoters saw PE as just passive equity capital, they are increasingly looking to partner with GPs. They want investors to be able to add value beyond providing capital, especially from a strategic perspective as they scale up. Second, promoters are also willing to cede control by selling larger stakes to trusted GPs, or even partner them. Both of these are significant mind-shifts as the Indian market has historically been a minority-deal-driven one, with limited interference of GPs in the operations of the portfolio companies.
To sum up, the Indian PE industry, though troubled by a poor legacy, is making the requisite changes and mind-shifts, which would result in a consolidation in the industry. This would improve the overall attractiveness and sustainability of this asset class, and finally provide profitable returns to the long term Limited Partners who invest in this space (and are carefully selecting the GPs they support).
Manish Kejriwal is Managing partner, Kedaara Capital Advisors
With contributions from Nishant Sharma and Sunish Sharma, Kedaara Capital Advisors LLP