Uniquely India

It is often seen as simplistic and trite to compare the private equity markets in China and India. They are – it is frequently stressed by their practitioners – markets as diverse as they are geographically different.

However at October’s Private Equity International India Forum in Mumbai, China was not the only uninvited guest in the room: Brazil had turned up too.

Comparisons between these BRIC giants abounded both on-stage and off, whether it was in terms of macroeconomic outlook or private equity performance.

While China’s growth curve was “flattening”, India’s high growth would sustain for the next 20 years, KV Kamath, chairman of ICICI Bank, told the audience in a keynote address entitled “Taking India Inc. to the next level”.

It shouldn’t be a question of “either/or” for LPs looking at investing into Indian, Chinese and/or Brazilian funds, said Cambridge Associates managing director Anouk van der Boor, stating that the universe of private companies available in each market was different and therefore complementary to each other.

In an on-stage interview, Alan MacKay, chief executive officer at fund of funds Hermes GPE, told the audience that India’s “real challenge” from an LP perspective is that GPs have “not yet demonstrated capital velocity”, unlike other emerging markets like Brazil.

“If you put $100 million to work in Brazil this year, almost certainly $80 million to $120 million will come back to you within five years’ time. In India will it be back in five years? I don’t know,” he stated.

The BRIC comparison chatter continued among the delegates outside the conference sessions. “Are there too many GPs in China too?” asked one attendee. Another wondered if valuations were comparatively high in China, while yet another questioned how to avoid becoming an emerging market that never quite fulfils its potential.

Would you find the same level of peer group comparison at a private equity conference in China? Unlikely; but then India – to return to the original point – is a very different market.

China, as the indisputable king of the BRIC markets, is big and self-sufficient enough in terms of funding to afford the luxury of being able to ignore its emerging market peers. However, many Indian GPs (and there are many – up to 400 according to most estimates), rely on a largely foreign LP base, and therefore feel a keen sense of competition with China – and increasingly Brazil – in what is still a constrained fundraising environment.

Perhaps because of this need to compete, much of the content of the aforementioned forum sought to define the specific characteristics of the Indian market and bring uniquely Indian interpretations to familiar private equity terms.

“What is the definition of a buyout transaction in India?” and “How do you define proprietary deal sourcing here?” were questions put to a live audience poll in the first day’s sessions. The greatest response, in case you are wondering, was split between “51 percent ownership” and “largest shareholder status” in the case of buyouts; and went to “no intermediary – sole access” in the case of proprietary deal sourcing, although it was agreed that the latter was extremely rare.

Speakers and audience members were also asked for their views on where the evolving nature of the country’s GP base would lead (with the consensus being that the country was slowly transitioning from a largely captive GP base to one dominated by independent managers) and realistic return expectations (IRRs of between 20 percent and 30 percent on exits were anticipated).

In his interview, MacKay also urged Indian GPs to bring a uniquely Indian interpretation to private equity fund structures.

The perceived lack of realisations is holding back fresh inflows of capital into the country’s private equity funds, he stated.

However, rather than rush exits to pacify LPs, Mackey suggested GPs should adapt fund structures to better suit the timeframe needed for private equity investment in India.

“India has just adopted the typical private equity fund structure, charging 2 and 20 etc. Is that actually relevant here given the longer timeframe firms have to hold some of these investments for?” he asked. “I think some of the smarter GPs might do some thinking about [fund structures] – and if they do, there might be some receptive LPs.”

Mackey’s final point was that Indian GPs needed to be “clear and confident” about the differentiated nature of their industry.
Given the levels of peer group comparison and introspection seen at the Forum, it seems the industry is still in the process of becoming clear on this point. Once the characteristics have been defined, the confidence will surely follow.