Private equity in India, just like private equity in many other markets, is going through a period of change and introspection. The global economic crisis has pulled the rug from underneath a number of firms, especially those that used to specialise in pre-IPO or PIPE investing. For the past year and a half, India’s SENSEX Index has been on a roller coaster: it collapsed last year to close at under 7700 before beginning a recovery that has seen it more than double, running at over 16,200 in early September. Local observers predict further gains before the year-end.
This may be great news for day traders and other champions of short-term investment, but for private equity investors looking to recalibrate their strategies it is not. Many local firms have lost money in the crash, and some of them will not recover; talk of industry consolidation is already widespread. Meanwhile those funds that are still standing and looking to deploy fresh capital are finding that the stock market’s newfound buoyancy is once again making it difficult to invest in assets at reasonable prices. Not only are valuations yet again becoming inflated but also asset owners are being drawn to regard the public markets once more as a ready (and to some, preferable) source of capital. It will be a while yet for private equity deal making in India to pick up pace. For the time being, patience remains a virtue.
The current limbo is forcing industry practitioners to spend rather more time sat on their hands than they would like. In such a situation, one welcome distraction is talk about one’s peers and rivals, and when PEI Asia visited Mumbai recently, it was no surprise to find the grapevine rustling.
The new business being built by Renuka Ramnath, the prominent former head of local powerhouse ICICI Ventures, was one of the topics that many people had something to say about. The new venture, called Multiples, is making progress with the formation of a debut growth capital fund, and the market is keenly awaiting its official launch to see whether Ramnath can replicate the success she had at ICICI. The aim is to grow Multiples into a multi-platform and multi-asset class manager.
Another talking point was the outlook for the international mega-firms that have set up shop in India. Onlookers don’t seem to be tiring of pointing to the challenges facing the big groups in the country. This view is predicated on the fact that India has relatively few private companies of size and even fewer entrepreneurs with a penchant for selling to financial buyers. Add in the fact that the use of classic LBO-style leverage is at present impossible in India and you really have to ask what the Blackstones and the KKRs are doing in this country – right?
Wrong, actually. If you talk to Sanjay Nayar, the freshly installed CEO of KKR India, about the firm’s plans you get a clearer view of the logic and the plan being implemented. In essence, the firm’s India strategy has three components: to invest in Indian businesses and help them improve operationally; to advise and support Indian companies wishing to expand abroad; and to help KKR's international portfolio businesses expand into India.
Does this sound mad – or naive? We think not. If you consider that the firm has already invested more than $1 billion of equity in two Indian businesses (Barthi Infratel and Flexitronics), and believe Nayar when he says KKR is not in a hurry to build its local franchise, it would seem premature to dismiss its Indian undertaking as poorly conceived. Nayar's own background, as head of Citigroup's Indian operations, also brings a network of contacts and depth of local knowledge that should help move the plan from theory to practice.
Given KKR's firepower, infrastructure, global networks and increasingly proven ability to adapt its business model to new markets and changing conditions, it is easy to see the firm turning the Indian operation into a meaningful part of its empire. Change and introspection, remember? KKR has shown itself pretty effective at both, especially after its big pre-crisis asset grab came to an end with the collapse of the financial markets. India may not have a buyout market, but so what? KKR is no longer just a buyout firm. It’s an example of private equity’s ability to reinvent itself, and those dismissing the firm – or the industry – as being out of step with today's mood and markets look set to be in for a disappointment.