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| Overview |
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| Impression
Sunrise |
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| After nine
years in the wilderness, private equity funds
are waking up to a pleasant reality of willing
promoters and sound business models. |
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| SHISHIR PRASAD |
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 What
a difference a year makes! If you had visited
a venture capitalist in August 2002, he would
have put you through the tea-and-sympathy
routine — tea from him, sympathy from
you. He had no exit opportunity and hardly
any deal flow. This pool of venture capital
was sloshing around without touching the plimsoll
line of any entrepreneurial boat. But today,
the moneymen look merrier. Deal flow is good.
Valuations are more realistic. Global funds
are ready to look at India afresh.
CDC Advisors, a fund that has put over $170
million into India, wants to set up a $150-million
fund that will invest only in India. It has
become the first private equity player to
grab a slice of the disinvestment pie by bagging
the Rs 218.13 crore Punjab Tractors deal.
Oak Investment Partners has hired Ranjan Chak
to look at Indian investments. Sequoia Capital
has put $22 million in 24/7 Customer. Newbridge
Capital’s Puneet Bhatia is criss-crossing
the country looking to deploy $40 million.
In fact, VCs are beginning to look like they
have regular dayjobs!
It is difficult to convince people, especially
after the Internet mania, that VCs may be
on to something big. A major reason is that
most VCs and private equity funds have delivered
only average performance. According to BW
research, the total VC investment has been
$2.4 billion since 1994 (that’s when
the foreign funds came into India with some
serious money). At today’s valuations
and stock prices, this is worth around $2.9
billion. Sure, there are funds like JF Electra
and CVC International that have seen three
times appreciation in their portfolios, but
the majority have either gone underwater or
have barely been able to keep their noses
above water.
Before concluding that high-net worth investors
and pension funds are funding another bout
of stupidity,let’s have a little clarity.
Point No. 1: like anyone else, VCs have a
right to learn on the job. India has never
been an easy proposition even for learned
tourists like Al Beruni and Hiuen Tsang and
it is even more beguiling for investors. The
uncertainty in the regulatory environment
also throws business plans out of gear. Point
No. 2: the Indian economy is poised to take
a big leap and it would be a shame if for
fear of failing again, we shun the opportunity
to fund successes.
Start with the difficulties of investing in
India and the man to talk to is CDC’s
Donald Peck. This diminutive Briton’s
eyes get wistful when you mention 2 February
2000. That’s the day when Sify’s
stock price touched its historic high of $424.
And on that day CDC’s $14-million investment
was worth $1.5 billion. Had CDC exited Sify
then, it would have made 100 times its investment!
But the government did not let it repatriate
the money. Or take telecom. Investors like
Warburg Pincus and AIG would have reached
for their bottles of Maalox several times
as the policy swung from one extreme or the
other. These investors have put in about $450
million of the $1-billion equity investment
in telecom. And when promoters are not able
to deliver, the problem gets worse. VCs have
finally realised where they can go wrong,
but one has to realise that venture investing
is a high-risk exercise. “Private equity
is normally about backing management teams
with limited track records. There will always
be mistakes,” says John Levack, managing
director, Electra Asia Partners.
Having completed their learning, venture investors
are ready to take advantage of key macro and
microeconomic trends. The first is that Indian
mid-cap industries have cleaned up their act.
Mid-cap companies are important because, typically,
that is where the venture investment is likely
to flow in huge quantities. That is because
with the help of some high-octane capital,
these companies can outperform the big boys.
Also, in mid-caps, it is easier for the investor
to be on the board and contribute to the company’s
strategy or financial restructuring. A look
at two surrogate variables shows this (See
‘Mid-caps catch up with the big boys’).
Over the last five years, mid-cap companies
have started to match bigger companies in
return on equity. That makes them attractive
to investors.
Second, mid-caps’ earnings growth is
beginning to match that of large companies.
This interests venture investors. “Indian
companies... have done some hard work in the
last five years. And that is something private
equity investors find attractive,” says
Renuka Ramnath of ICICI Ventures.
The second factor is the rise in employable,
young workforce. The percentage of the working
population between 15 and 59 years has increased
from 52% in 1997 to 60% in 2003 (Planning
Commission data) and will rise to 63% over
the next four years. Five years ago, it would
have been difficult to imagine where such
large masses of population could find work.
But now BPO alone will employ 2.5 million
people by 2008. This workforce is going to
be made available to globally-competitive
manufacturing and services companies and strong
domestic sectors like banking and media. All
these areas will see venture investments.
Mind you, these are not the $10-million-or-so
deals that VCs used to strike earlier. The
new deals involve investments of $30 million-40
million or even more. Already, Centurion Bank
and UTI Bank have seen that sort of money
flow in. So has NDTV. BPO and IT services
will see larger transactions happening as
the 24/7 deal shows.
 VCs
have realised that they are as much the owners
of companies as the promoters and will have
to get involved not just in operational performance,
but also in influencing regulatory regimes.
This is something that they have been loathe
to do. “The attitude till now has been
to invest like a financial investor. The concept
of building companies still hasn’t come
in,” says a VC. They will also have to
be more realistic about how they structure
deals so that their money remains safe.
Investors must also encourage entrepreneurial
managers to join their ranks. GW Capital has
made some progress in this regard. “We
have managers who have run large corporations....
(They) know what it is like to run a company
and can help portfolio companies grow,”
says Vishal Nevatia, CEO, GW Capital. More
such examples are needed if VCs are to get
it right this time. For far too long they
have depended on people from financial services
or consulting to make a difference to the
operations of companies. But now they have
to get management professionals to improve
business performance.
This survey will seek to show the performance
of venture investments. It will show that
private equity funds, if they scrutinise their
past, will have enough success models to follow.
It will demonstrate that deal structures have
started changing and this will create a better
relationship between investors and promoters.
And, finally, it will make a case for why
India needs homegrown funds. |
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