‘Private equity industry needs regulatory clarity’

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Darius Pandole, Partner, New Silk Route
Darius Pandole, Partner, New Silk Route

Even after investing about two-thirds of its $1.4 billion fund, private equity firm New Silk Route has significant dry powder to scout for interesting opportunities. Darius Pandole, Partner, New Silk Route, talks about his outlook for 2013 and some exciting investment themes. He also talks about challenges faced during the year and the regulatory clarity which the PE industry needs. New Silk Route has investments in companies such as 9X Media, Destimony, Coffee Day Resorts, Ascend Telecom and Nectar Lifesciences.


How has 2012 been for the private equity industry?

The last cycle or the last few years have been difficult for the private equity industry in India. This was primarily because India had become so prominent in the eyes of global investors. There was a situation where we had an over-supply of capital. This led to various issues in terms of increased competition leading to higher valuations. One of the key determinants of success of an investment is the entry price. If that entry price is violated, then that results in sub-optimal outcomes. Also, from an industry perspective, I think it’s very important to recognise that venture capital and private equity have taken their place as legitimate asset class supporting high growth companies.

This has gone a long way in funding the growth aspirations of entrepreneurs and meeting the gap between the growth funding requirements of companies. I think the role of private equity investors backing Indian business must be acknowledged

What challenges did you face during the year? If you can comment from the regulatory perspective?

It has been a challenging environment in many ways. There is an inherent entrepreneurial energy in the Indian economy which has led to significant deal flow across sectors. The overhang of significant dry powder in terms of funding for opportunity has reduced significantly over the last two years. As a consequence of that, the balance for the demand for PE capital and the supply of PE capital, is now reaching an equilibrium, which should have an irrational effect on valuations. The single biggest issue facing the industry is that we need to show more exits both in terms of the amount of realisation as well as IRR. Most players are cognizant of that and once we see more exits, it will really lead to more capital flowing in and more confidence in the PE model in India.

All we are asking for from a regulation perspective is that there should be clarity and consistency. If that is the case, Indian investors and entrepreneurs are smart enough to work around that. Problem arises when there is inconsistency and lack of clarity.

From a PE industry perspective, given the prominent role that PE has played in funding entrepreneurs in the last decade, the norms for entry and exit should be simplified to the maximum extent. There should be consistency. No special favour that we are asking for. However, we are optimistic that the regulatory environment is continually improving. It seems to be an interesting time to look for investee companies.

What is your outlook for 2013?

We are cautiously optimistic at looking forward to 2013 because we could be entering a new cycle for PE that could result in more positive outcomes than the last cycle. This is on the back of a number of factors. The PE industry has seen one or two investment cycles — the industry is more experienced, more mature and better equipped. They know the risk of making investments in India and how to price that risk of doing business. At the same time, Indian entrepreneurs are more used to seeing PE partners as legitimate partners in the growth process. Hence, there is a greater acceptance of what is required by PE investors.

Which sectors are you evaluating now?

The play on the Indian domestic consumption story is resulting in attractive growth and investment opportunities in a number of sectors that are consumption-driven. Sectors such as FMCG, speciality retail, food and beverages, are interesting. This consumption story seems to have significant potential to play out in the next few years. Also, sub-segments within the realm of infrastructure, should have significant growth and investment opportunities. I see significant potential in renewable energy and logistics as well.

There is much less regulatory overhang in the renewable energy sector. Also, the gestation period for setting up a wind energy plant or a solar energy/biomass is significantly lower than a thermal plant. The IT and e-commerce segment is also an interesting segment we are looking at.

With your first fund almost six years old, when do you plan to raise your second fund?

The size of our first fund is $1.4billion. Over two-thirds of this has been invested. We are not discussing our second fund now. At this point, the imperative for us is to work on our portfolio, to add value towards realisation, as well as seek value opportunities from an investment perspective for the pending dry powder that we have. We’ve got time to use the fund — adequate time.

The average deal size is in excess of $40 million. Strategically, we are looking at more and more at opportunities where we can take a significant stake in companies to enable us improve the outcomes in these investments. As a consequence of that, we have a strong operations team, and are involved in operations and management of the investee company.

Are you ready to exit any of the companies NSR has invested in?

We are exploring exits in a number of companies. The IPO window has been shut for the 2-3 years. We are finding exit options that have become more prominent —strategic sales, secondary sales of listed companies and secondary sale from one PE fund to another. We exit typically after 5 years. In some companies, we are ready to stay invested longer. For example, 9X has been a dramatic turnaround story for us and one that is now doing well as it embarks on a new phase of growth.

We remain bullish on investing in India and are looking strategically to invest in sectors that we know and understand well.

(This article was published on December 5, 2012)
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