India Round Table: Waiting For Take Off

In a bustling and sweltering Mumbai, Private Equity International sat down in a cool, air-conditioned room with four experienced Indian private equity specialists just as prime minister Narendra Modi was marking the anniversary of his first year in power.

Modi’s sweeping election victory was met by a surge of euphoria, with the public markets rocketing and renewed optimism in the private equity sector that he would deliver on his promise of long-awaited pro-business reforms after a disappointing few years for the asset class.

According to Bain & Company India-focused fund allocation – excluding real estate and infrastucture- dropped by 40 percent in 2014 which contributed to dry powder falling to $8 billion from $9 billion in 2012. Meanwhile the Indian market has only returned around 38 percent of the $112 billion of private equity capital invested in the country between 2000-2014, so LPs have become much more selective when choosing GPs.

While no one could underestimate the enormity of Modi’s task, there have been some helpful tailwinds. Inflation is down to mid-single digits, with the lower oil price being a key contributor to a falling current account deficit, now down to one percent, from 4.9 percent in mid-2013.

After the heady fundraising years leading into the financial crisis, Indian private equity has had a much tougher time of late, with many funds unable to return capital to shareholders over the past three or four years and a number of big international firms exiting the market. While that negativity seems to have been swept away with Modi’s election victory, the general mood of PEI’s four roundtable participants was one of cautious optimism that better times were round the corner.

There was certainly an acknowledgement that short term obstacles remained, but Ramesh Venkat, Religare Global Asset Management CEO Nalin Nayyar, Kroll managing director Reshmi Khurana and IL&FS CEO Dr Archana Hingorani were in agreement that Indian private equity would be in a much better place five years down the line. How to get to that point, meanwhile, was quite another matter.

There was a genuine belief among the quartet that Modi would ultimately deliver, but also that investors were going to have to be patient.


In terms of the capital raising environment, all four were in little doubt that a profound change of sentiment had occurred as a result of Modi’s victory.

Religare’s Nalin Nayyar begins: “In 2012 fundraising in India was almost a dirty word. As soon as the new prime minister was nominated we saw a sea change from not getting meetings to getting meetings with LPs the very next day. People thought that there was going to be a clear mandate.”

“LPs and investors wanted to believe. They wanted to allocate to India and Asia. They were slightly scared of doing that so they wanted a reason to do it and Modi has given them that.

“Has it worked out as they wanted time will tell,” he adds.

Ramesh Venkat agrees that sentiment has completely changed but says the hard lessons learned by LPs since the boom years has left many of them more circumspect and careful in their GP selection than before.

“There has been a sea change but it’s far from irrational exuberance and more like cautious optimism. LPs want a close look at what is happening but they are going to be much more selective.”

“There is interest in India but it is not like 2006 – 2007 once again where you go to market for $200 million and come back with $700 million. That is not going to happen.”
Venkat thinks LPs are still learning to be comfortable again with the level of risk involved with selecting the right GP for their investors – and longevity has become a crucial factor.

“Those who are on their second or third funds are going to have it a little easier. Track record has become predominant and many LPs today would rather go with the GP with average performance but a longer track record, than one with no significant track record.”

“There are only 22 funds on a second fundraising or more in India out of around 200 local GPs. The key differentiator is whether you have actually given back any money to investors. That matters more than anything else.”

Kroll’s Khurana also thinks LPs are being much more careful in their selection process and that having long-term local knowledge of conditions on the ground is important for many prospective investors.

“Quality of management is very important. Does the team have good quality international experience to tackle the Indian market? We often hear from LPs: ‘what does the second level of management look like? Especially for infrastructure and real estate where it’s important that the team understands the local environment but also follows globally accepted governance practices when it comes to identifying investment targets and executing deals.”


In terms of co-investment, all four participants agreed it was being used largely as a cost saving exercise, but also that it was quite hard to execute without local expertise.

IL&FS’s CEO Hingorani says: “When I give co-invest capital it’s another way of saying I’m not paying full fee. Co-invest is important but those most comfortable doing the co-investing are those on the ground. It only really works for those that understand the market on the ground.”

Venkat agrees that LP co-invest is not always possible due to the relatively small size of most deals, and that the temptation to try to increase the size to make it a more viable option comes with its own risks.

“There are not many co-investment opportunities in India where a sizeable co-invest is possible. A $2-5 million deal is possible but not often a $20 or $40 million deal.”

He adds: “There is a temptation to make a $20 million deal into a $30 million deal but it is a risk. Deal sizes are going up but not dramatically. But it makes sense for foreign investors to use co-investing and I expect to see more of it as well as more direct investing. However it is not easy even for those who are local.”

And what of the conditions on the ground? Has the market changed enough to encourage more overseas capital back into the country? And what of the Indian business owners, who have historically been known for their tough negotiating and dislike of allowing investing partners to have majority stakes in their companies?

For all four, understanding local business owners – or promotors – has never been more important.
Venkat says: “Each market is unique so to that extent, local knowledge does help. Most of us can’t just overnight move to China and open a PE company for example.

“What has played out in India over the past five or six years is that understanding the Indian business owner or promotor is as important as understanding private equity itself. Indian promotors do think in a particular way which is important to understand.”


“None of us can say we have total success dealing with them, but some experience of doing it over the years is of great value.”

Khurana adds: ‘Disagreements may arise between GPs and promoters because there are changes in the promoter’s family, they may have differences in the valuation expectations and their shareholder rights, or the promoter wants to renegotiate the terms of the exit in their favour. It often occurs close to an exit.”

While Nayyar adds that with many Indian promotors, “everything is up for negotiation”, Hingorani says that at the eleventh hour some promotors will try to change the terms of a deal, keeping GPs on their toes.
She says: “A promotor might come to you and say: ‘you are making so much from this deal, why don’t you give me a 10 percent discount?’, which is like pulling the rug from under your feet when you feel you have built up a level of trust.”

Nayyar adds: “A lot of the most successful operators are those who can maintain a strong relationship with the promotor. It is almost like a marriage; you have to keep the dialogue going.”
And with average company holding periods getting longer, more emphasis and pressure is being put on the terms of the deal all the time.

“The intensity and closeness of the relationship, and being mentally as well as legally aligned is so important. It doesn’t take away risk completely, but it does help,” Nayyar adds.

The importance of dealing with more than just one or two members of a family business can also be a crucial part of the role for a GP according to Venkat.

“Sometimes it might mean knowing the extended family; who the other influencers are; what the tensions are, and who will call the shots. It could be two guys or it might be 10 people. It is never easy,” he says.

“It’s the guy you’ve never met. He will call the shots at some point so you better know who he is,” he adds.
Khurana says GPs need to be thinking long term, and that the level of monitoring does not suddenly reduce once the due diligence stage has been completed.

She says: “You can only do a certain amount at the due diligence stage because the access to the management and to the records is limited. What happens is it only goes a certain amount of the way so the level of engagement post due diligence, and post the closure of the deal, needs to continue.” Investors should take an active and investigative approach to understanding the true business practices and controls in the portfolio company and use various fraud prevention tools to ensure their interests are protected.”Nayyar agrees: “If you ever have to look to your documents to sort an issue then you have a problem. At that point you may have written off your investment to zero and anything you do get will be upside.”

And with Indian families still tending to call the shots in terms of retaining control stakes in their companies, does this make life more difficult for GPs looking to invest?

According to Ramesh Venkat it makes little difference to the overall predicament and does not mitigate the risk of deals going sour.

“If you want to play hardball to renegotiate a deal, it is possible whether you have a 30 percent holding or a 70 percent holding.”


With a smaller number of players putting capital to work, valuations have been going up recently.
Khurana has noted an uptick in competitive deals but says the challenge is whether there is enough capital entering the market to change that.

Competitive intensity in deals has not changed much and it is unlikely to until there is more capital coming into the market, says Venkat.

“It is a very good time to invest because if this government gets its economic measures right, the next five or six years will be a very good time to invest in India. In the last cycle we had three and a half years of good times followed by three and a half tough ones,” he says.

“Even if we end up paying a little more because of the competitive deal intensity, there is a chance of better growth ahead,” adds Venkat.

The panelists all agreed that this time round, things do look more rosy for India over the next five to seven years.

“A decade ago, steady 7 percent GDP growth was forecast but it never happened. With this government in place, we have the right structure now to make it happen,” says Nayyar.

Modi has won plaudits at home and abroad with his foreign policy efforts to encourage trade and attract foreign investment but on the domestic front, the picture is less clear.

A number of tailwinds have helped, and in particular lower commodity prices, but corporates continue to struggle despite his pro-business agenda and while public markets soared over the first few months, there has been a palpable sense of disappointment in many quarters that not more of the reform agenda has filtered through to kick start the investment cycle as yet.

Hingorani believes most core sectors of the economy have yet to feel the benefit of Modi’s policies and that changes were not going to happen overnight despite the healthier longer term outlook.

Khurana agrees: “India is too bewildering and large to turn itself around in a year. What has not happened yet is the restarting of the investment cycle but that is linked to other areas of the economy such as the supply chain.”

She believes that while there has been a relative lack of clarity so far on Modi’s longer- term economic plans, most of the private equity clients she advises at Kroll are relatively sanguine about the pace of India’s social and economic transformation. 
“We don’t hear enough about the long term plan which is part of the problem, but our private equity clients are not that worried. They have learnt from the previous five years: don’t forget the fundamentals –if you pay the wrong price you will always struggle.”

For Nayyar, LPs are faced with a binary choice: either back India wholeheartedly, or look elsewhere in emerging markets.

“You either go to seek companies in countries like China or Vietnam, as some GPs have done, or you take a view that this [India] is an entrepreneurial economy that works best when it is left alone with light touch regulation.”


He admits that the sheer scale and diversity of the country adds to the complexity when making a decision on committing to Indian companies, but thinks that patient investors will be rewarded.

“It is as complex as the EU with religion thrown into it. It took Maggie Thatcher a long time to turn around a country the size of Uttar Pradesh, so it is going to take time. It is the media that has played it up.”

The general feeling round the table is that Modi has got his priorities right by trying to encourage foreign investment.

“My message would be: be smart about how you play India, but certainly play it,” Nayyar adds.

Some of the structural reform has already been put forward such as the land acquisition bill and attempts at increasing the level of taxation through a unified national goods and services (GST) tax.

Venkat also highlights the proposed new Companies Act and sweeping labour law reforms as being a longer term positive although he acknowledges that more still needs to be done to restructure the banks.

Several days after the Mumbai roundtable the GST proposals were thrown out by a parliamentary committee, emphasising the fact that Modi’s BJP will have a tough time pushing through strands of their reform agenda.

All four attendees concede that the going will remain tough, at least over the next couple of years.

“All of this will take time so if you are a long term investor it is very easy to be positive on India, but for short term investors it is hard to be so positive. For the likes of us, who are somewhere in the middle, it is an extremely tough call,” says Venkat.

“I would make the call that the intentions are right and it follows that sectoral selection becomes even more important when selecting Indian companies.”

Khurana believes there is enough data to help investors pick the right deals.

“You have to get your hands dirty as an investor and not be sitting in an office elsewhere making investment decisions.”

So what are the best sectors? Is a generalist and opportunistic approach the best strategy for private equity in India?

Venkat thinks so: “Given the uncertain circumstances we have already discussed, it is very hard to say whether infrastructure or healthcare will do better over the next five years so you have to take a generalist approach. Another reason is that in many sectors, such as healthcare, the depth is not there yet.

“If you have ambitions of size and skill in India, it is very difficult to be a private equity sector specialist today,” he adds.

Hingorani says that IL&FS used to do sector specific funds such as an autos fund in the 1990s, but all the firm’s more recent raisings have been generalist, albeit with some extra specifics.

“Certain themes cut across the generalist approach. Doing capital light transactions is one or deals that cater to a large population rather than a niche one,” she says.

On a day when a major local bank are holding a seminar on e-commerce in the same hotel, some India observers have warned that an asset bubble is developing in that sector, but while the panel were wary of some of the valuations in the sector, the all-encompassing nature of e-commerce meant that they couldn’t ignore it.


For Venkat, most mid-cap firms will struggle to get a public listing away in the current environment.

“Fifteen years ago you could do a successful IPO with just retail investors, but now, like other markets in the world, most listings are dominated by large foreign investors and to an extent by large Indian mutual funds. They want greater liquidity which rules out a number of mid cap companies coming to market.”

While sentiment towards listing is better, he argues that against a backdrop of poor recent performance many investors will be looking to hang on as they anticipate an improved environment over the next five years.

Valuation is another key hurdle. The price strategic investors want to pay will not be what the selling investor wants, Venkat believes.

For investments that were done in the previous cycle between 2005 and 2009, pursuing an exit strategy is going to be tough, while the fluctuations in the value of the currency had also hurt the perception of returns to investors.

Venkat expects to see an increase in strategic exits however due to a perceived increase in Indian families wanting to sell out.

“The younger generation are culturally very different and don’t necessarily want to take control of the family business. Some are wanting to leave cash to future generations rather than shares.”

The panel also agreed that another opportunity for buyouts will come from corporate India, with companies looking to spin off non-core assets.

Looking into the near future, the level of uncertainty remained for all four attendees as to when the investment cycle would pick up.

Hingorani says: “It is not yet here, despite the positive macro trends. If there is any worry it is when will the investment cycle get triggered and result in investor confidence for private equity? Capital markets may have performed but earnings haven’t. In the next five years will we get to a decent growth level, but in the short term it is unclear as to the path it will take.”

Nayyar adds: “Let’s evaluate the government after five years. In the past India has grown despite the government but 
I’m cautiously optimistic that it will continue to do the right thing.

Venkat agrees: “It is early days yet. We have the ingredients in place for successful growth, but have to give the government time. The indications are that they are doing the right things but it will take time.”

And for Khurana the cautious optimism for the future is bolstered by the greater level of understanding and engagement she is seeing from GPs coming to her for advice about investing in Indian private equity, although there are caveats.

“I am optimistic because we see the GPs that come to us are now very focused on due diligence and have a better understanding of corporate governance. It wasn’t like that four or five years ago but it is now.”

But she adds: “Plus corporate governance in India is evolving in a positive way, and this is being led by a new generation of entrepreneurs. The question is, once these businesses grow to a particular size and scale, will these entrepreneurs and the corporate governance foundation they are establishing be able to withstand the external pressures that often accompany growth?”


is CEO and executive director of IL & FS Group, having been with the firm for 21 years. She has over 28 years of experience in the financial services industry, teaching and research, of which 18 has been in private equity. Hingorani has invested around $18 billion in private equity while at the firm.

is a managing director at Kroll’s India operations. She has more than 15 years of experience in the US, South Asia and South East Asia conducting complex corruption investigations, litigation support, and due diligence on the management, operations and business models of organisations. Her clients include asset managers, corporations in the mining, oil & gas, consumer packaged goods and pharmaceutical industries, and law firms.

is CEO of a multi-boutique asset manager, Religare Global Asset Management (RGAM). He has more than 22 years of experience in the financial services industry, first with Citigroup in New York, and then Lehman Brothers. He moved back to India with Lehman in 2006 as part of the team that developed and grew Lehman’s India business and returned to Citi in 2008, this time in Mumbai.

Ramesh Venkat
is the founder and managing partner of Fairwinds Asset Managers and heads Fairwinds Private Equity. He started his 25 year career with Unilever India, before taking senior positions in two multinational banks, ANZ Grindlays and Credit Lyonnais. Subsequently, he worked with two large Indian corporate groups, Vedanta Resources plc and Reliance Group, before setting up Fairwinds.