Private equity firm Actis Advisers has invested $1.2 billion in India across deals in the power,pharmaceuticals,industrials and financial services space. JM Trivedi,partner & head of Actis South Asia,speaks to Shruti Ambavat on falling PE valuations and the subsequent market revival.
How has the investment environment for PE changed in the recent years?
In 2008,when the financial crisis hit us,about $25 billion of PE money was chasing deals. Against this,the PE investment level was about $17 billion in 2007 and everyone expected that to rise to around $25 billion in 2008. Post the financial crisis,the investment levels dropped to $12 billion in 2008 and to $3.5 billion in 2009. So,the demand went down,but the supply remained high and,therefore,after the financial crisis,valuations remained reasonably high in PE. This is finally changing because over the last three years,the amount of capital that has been raised for India is lower than the amount of capital invested. The dry powder in the system has come down and valuations in PE space are finally becoming reasonable.
Why has the PE industry in India not delivered expected returns in the last cycle?
During 2005-2008,there was too much money chasing deals. This,combined with expectation of very high earnings growth on the back of a fast-growing economy,resulted in PE players paying high valuation multiples. Post the financial crisis,the growth was lower and the exit multiples were lower than the entry multiple. The returns for the last cycle are,therefore,low.
Why is the sentiment around India still negative among the LP community?
The first reason is that LPs have been disappointed with the returns from the 2005-2008 cycle. Secondly,given that the IPO market has been difficult in the last 2-3 years,GPs in India have not been able to exit from the minority growth capital deals,which were more than 90% of the invested capital in the previous cycles. When the IPO market is not doing well,selling to financial investors is an option for exit in such deals. This,however,requires a good relationship with your investee company and strong exit rights. Again,a large number of PE funds during 2005-2008 didnt have strong exit rights. About $30-35 billion was invested during that period. Most of these investments have not been exited yet. Finally,the economy in India has been very slow in the last 12-18 months and the investment environment is very negative.
What has been the strategy for Actis in India when it comes to investments?
More than 50% of our capital has been invested in control deals. Given that the strategic interest in India continues to be reasonably strong,it is less difficult to sell control investments. We had our share of difficulties in selling minority deals,but our strong exit rights and good relationship with investee companies have helped us in making regular exits. Having said that,we could have sold more had the environment been more conducive.
Is LP-GP relationship tense right now?
The right word is disappointment and not tension. LPs realise the difficulties that GPs are facing in India,but it does not take away their disappointment with India.
What are the implications?
There is no doubt that the PE market will consolidate. Those who have not been able to deliver good returns will not be able to raise new funds. The consolidation is likely to continue for the next two years.
Has the difficult environment resulted in tension between PE funds and promoters? How has Actis handled this?
When it comes to relationship between PE funds and promoters,the most important factor is alignment of interest. If you are fully aligned,you can jointly address the difficulties on account of the external environment. Misalignment can be due to very different issues. In one of our deals we had,some partners were more than 75 years of age. Understandably,they were more interested in receiving dividends and then investing for growth. We had to align ourselves by convincing some of the younger members of the family to buy the stake of the elders to solve this misalignment.