The Hindu Business Line : A lot of money chasing deals

Investment bankers who can ideate, test the story and structure deals with conviction, might have an edge over others who just run processes or “join the dots” through intermediation.

Mr Thyagesh Baba, Director, Investment Banking, Spark Capital Advisors.

K. S. Badri Narayanan
V.R. Vinod Kumar

The booming capital market has seen a number of boutique investment banking firms mushrooming in the country. With quality teams and a relationship-oriented approach, some of these firms have been able to distinguish themselves from the lar ger international players. One such company is Spark Capital Advisors, which has interests in institutional broking, merchant banking and asset management. In an interview with Business Line, Mr Thyagesh Baba, Director, Investment Banking, talks about the trends in the deal-making industry.

Excerpts from the interview:

Has the booming market conditions made your job easier in helping companies raise funds?

The market conditions have positively impacted deal-making — expanding fund-raising horizons for corporate houses, bringing in flexibility of structures, making cheaper capital available and creating a good environment for deal-ideation across several sectors. The attendant negatives are that valuation/return expectations, driven by mismatches in risk perception and listed-market pricing, are getting to be more challenging.

What are the recent trends in investment banking?

We believe deal sizes are becoming more sizeable and big and small banks, of Indian and global pedigree, see enough flows to justify a serious presence in the Indian markets. The serious entry of the global bulge-bracket firms is an indication.

There is a lot of investor money that is chasing deals — ideas that are differentiated and undifferentiated — and we believe there is a high risk of the investment banking community being less discerning and less choosy than is recommended. This could probably be a function of the “momentum” approach scoring over the “value-based” approach in the short-term.

Investment bankers who can ideate, test the story and structure deals with conviction, might have an edge over others who just run processes or “join the dots” through intermediation. The balance between “Big Firm” association and “Resource-Dedication” to transactions is also being more critically examined by corporate houses.

What are the deals that you are working on currently?

On the corporate finance side, we are working on 11-12 deals —three of them in the capital goods, two each in IT services and technology products and the rest in BPO, infrastructure, NBFC and media. They are a good mix of M&A and fund-raising transactions, running both buy- and sell-side mandates.

The asset management practice has begun independently looking at 2-3 deals in the retail and manufacturing spaces.

How is the competition in your sector? How do you differentiate yourself from others?

There is intense and healthy competition in our sector and there is still space for all constituents to grow their businesses.

Segmentation, in terms of sectoral and product specialisation, geographies and deal-sizes tend to clear the competitive clutter to some degree.

As for differentiation, we can only draw upon what our clients and patrons in the corporate and investing communities have provided as testimonials.

Given that most of our growth has been driven through references/recommendations, even global funds have been happy engaging with Spark as “Buy-side” advisors, we believe there are material, positive differentiators we get to the table.

Do you see any slowdown in private equity investment following SEBI’s recent move on FIIs?

We do not foresee such a correlated slowdown. On the contrary, one could argue that the PE industry might benefit from this directive — FIIs, through pre-IPO and other unlisted deals, were stepping into the PE domain. Lack of interest from FIIs would mean more opportunities for PEs to consummate!

By their very nature, the flows arising from PE (FDI) and FII (portfolio, secondary market investing) are very different.

Their outlook in terms of tenor of investment, need for liquidity and returns are different too.

In which sectors do you foresee higher PE investments in the coming months?

Rather than look at deals sector-wise, we tend to think of them thematically. We believe that companies that ride on the infrastructure, outsourcing and domestic consumption themes will attract PE capital.

Within these themes, businesses that are built by high-quality managements, on sustained operating profitability, good returns on equity, above-normal growth and ability to scale and corner market share are the ones that attract our attention as “bankable” names.

What’s your take on the capital markets in the short term?

We believe the long-term trend in the markets is expected to stay upwards, given India’s good GDP growth rates and strong fundamentals on asset turnovers, returns on capital, domestic consumption and regulatory fabric.

The short-term swings, albeit less desirable, are more reflective of temporary exuberance and technical factors, driven predominantly by capital flows, both domestic and FII.

The markets could therefore be range-bound, till fundamental factors begin contributing to sustained buying at higher levels.

For the first time, over the last decade, we are in a situation where even a 20 per cent dip from these levels, would not have long-term investors unduly perturbed.

The hit might wipe-off the gains they have made over the last 18 months, perhaps, but will not eat into originally invested capital or their family jewels!

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