Slowing growth, lack of liquidity and recently disappointing returns have cooled investor sentiment toward China and India. But Baring Private Equity Asia sees opportunity.
“Everyone loved China when the markets were at 50x earnings a few years ago. But now that the stock market is at 8x earnings, no one likes China,” says Jean-Eric Salata, CEO and founding partner.
“It’s the old greed and fear cycle playing out. We’re in the midst of that cycle now, and it will continue for some time because of macro and political issues in some countries in the region. But valuations are attractive. For investments made today, returns should be very good.”
Salata likes opportunities in China’s “new economy” characterised by small, nimble entrepreneurial businesses such as online game developer Giant Interactive, which it privatised from the NYSE, together with Hony Capital, in a $3 billion deal this year.
“[Giant] is noncyclical, has no capex and has great margins,” Salata says. “It’s a service business targeting middle class entertainment dollars, and is also expanding to third and fourth tier cities through the internet.”
The firm also likes China’s food and food safety-related companies, retail-oriented businesses and healthcare.
On India, Salata is similarly upbeat – although he acknowledges that the rupee’s plunge against the US dollar has had a big impact on returns for private equity investors in the country.
“The importance of currency hedging really moved up in the minds of investors. From our standpoint, we do a lot more hedging than in the past. There are costs associated with that, but it removes an additional level of volatility from the portfolio.”
In particular, his team hunts for naturally-hedged investments. For example, Baring’s $465 million buyout last year of India-based IT services company Hexaware (the firm’s largest ever India deal), is essentially a US dollar business operating in relatively low-cost India and is therefore a natural hedge against rupee volatility.
In addition, valuations are attractive in India, he says: Hexaware had 29 percent year-on-year EBITDA growth in 2013, and Baring bought it for 6.9x EBITDA.
“We haven’t seen that level of value versus growth in a long time in India. It’s driven by the negative sentiment toward India’s macroeconomic picture. Historically the country has been very expensive.”
He believes India still offers opportunity in the “old” economy. Last year the firm invested $236 million in ready-mix concrete business LaFarge Cement India, an affiliate of the Paris-based parent group.
“Infrastructure building ground to a halt due to politics. We believe this will turn around, construction will come back and cement companies will benefit.”
This article is an excerpt from Privately Speaking in this month’s issue of Private Equity International. Read the full article here.
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