Contact Us
News

BUILDING INDIA WITH PE FUNDS

Financial Express

June 02, 2011

Back

Clearly there is an expectation from the government that the private sector will play a significant part in actually putting money into the space. So unlike in most other economies where the government has spent the lion’s share of what has gone into the infrastructure sector, I think in India we are looking at anywhere between 40-50% actually coming from the private sector. The other big ticket opportunity for private equity is the fact that if you look at the balance sheets of a lot of the companies that are currently spending in the space and potentially will spend, they are already pretty stressed in terms of their equity: debt ratios, so they will need to go out and raise some equity to be able to finance this. So you look at the large development companies, you look at some of the large construction companies, they are going to require further equity financing.

WHY ENTREPRENEURS HAVE UNDER-UTILISED PRIVATE EQUITY FIRMS IN THE PAST

We haven’t seen many controlled transactions, where the private equity firm is actually coming in and buying management control, or buying significant control. There is a huge control premium that is expected, very few companies are willing to give up control. This is in contrast to the role that private equity has played globally where typically a lot of transactions have actually been controlled transactions. So you have a situation where the entrepreneur wants investment but is not willing to give up control. You have a private equity environment where globally they have been far more weighed towards the controlled environment. So if the entrepreneur here was willing to actually give up a little more in terms of their controlling stake in the company, probably you would have seen a lot more transactions than what have actually happened. One of the reasons why we think we are going to see an expanded growth of private equity is the market has matured over the last 5-10 years. The last 5-10 years have really been the early days of private equity in India and I think we are reaching a far greater level of market maturity where the entrepreneur understands that private equity can actually bring value beyond money.

WHAT THE CHALLENGES ARE FOR PE INVESTORS

One challenge of course that private equity faces is that at the end of the day you are talking about public utilities. They will have the comfort of quasi monopoly assets, but on the flipside given that these are public utilities, there is going to be some natural banding of returns. Also, given that a lot of these are going to be competitively bid out, you are not going to see high twenties returns, probably going to see late teens, early teens returns. Slightly more moderate than what you would have in normal private equity, so that’s one of the things that private equity needs to get accustomed to.

BARRIERS TO FASTER PRIVATE EQUITY GROWTH: EQUITY MARKET FLUCTUATION

Equity market fluctuation puts a barrier on what is an acceptable deal value on both sides. Even if the markets have tanked then obviously the promoter will be very reluctant to sell at those values. On the flipside, if the market valuations are supremely high then private equity is very reluctant to come in at those numbers.

Back