Indian GPs turn to alternative strategies(2)

As LPs become disillusioned with typical growth capital investment strategies in India, firms are exploring alternative strategies such as PIPE deals and distressed investing.

Private equity firms in India are exploring investment options apart from growth capital opportunities, which are impacted by macroeconomic swings and chased by too many competitors, according to industry sources. 

“Nineteen out of twenty funds [in India] have the same strategy – to take minority equity stakes in unlisted companies,” said Manoj Thakur, chief executive of Avendus PE Investment Advisors.

Avendus, for example, is planning to do more PIPE investments. The firm expects to launch its third India-focused private equity vehicle in April with target of about $90 million. 

The fund, which will have a four-year investment period, will take small equity stakes in mid-size businesses it believes are undervalued on the Bombay Stock Exchange. The team then works with the management to improve corporate governance and investor relations. Avendus doesn’t take board seats on the companies but will often recommend potential board members to promoters. 

Former head of ChrysCapital Ashish Dhawan believes that PIPE deals have been a key part of his former firm's success. ChrysCapital is the only Indian GP that has successfully raised six funds and returned significant amounts of capital to its LPs. 

“Essentially our strategy all through was growth capital investing through a mix of private and public [companies], because we realised in the Indian context there are a lot of public companies so it was important to have that flexibility,” he said in an earlier interview with Private Equity International.

“Private equity is very cyclical, so the advantage of having flexibility on the public side was that when markets were down, entrepreneurs in private companies didn’t want to raise money, but you didn’t have to argue with an entrepreneur in a public company because their stock price was what it was.”

A number of firms successfully raising capital in India have adopted special situation or credit-related strategies. Thakur added, “A differentiated approach is absolutely required. PIPE is one of them and credit [funds] is another.” 

SSG Capital Management, which closed a second special situations fund in November on its $400 million hard-cap, has reported increased returns from its previous vehicle. 

In 2011, the IRR for SSG's distressed portfolio was 20-23 percent, compared to 12-14 percent in 2010, according to Shyam Maheshwari, partner at SSG. He expects the 2012 figure to be at or higher than the 2011 numbers.

Another alternative approach comes from a joint venture between ICICI Venture and Apollo Global Management called AION, which is raising a special situations fund targeting around $500 million. The fund made a first close on $350 million last June.

Debt is increasingly becoming a significant issue in India. According to ICICI chief executive Vishakha Mulye, many Indian companies in the last decade borrowed foreign currency convertible bonds (FCCBs) in the international market. The total value of FCCBs expected to fall due in the next 3 years is around $42 billion. 

“Many of these were borrowed at the rate of INR 45, but today the rupee is at INR 55 to the US dollar. Today, it is a problem for some of them because the bonds have not been converted and they have to meet these debt payments that they had not envisaged in terms of their cash flows when they [initially] borrowed.”