“With many PEs clamouring for good deals, valuations are likely to remain high,” says
BL Research Bureau
“Two years ago one could be a total greenhorn and still raise money”, says Mr Mayank Rastogi, Partner, Ernst & Young. But with the Indian PE cycle coming of age, raising new funds is not the same anymore. In an interview with Business Line, he discusses some major trends in the PE industry. Excerpts:
Why have PE exits risen in the last couple of quarters?
Large part of PE investments in India started in 2004-05. Now if we take the conventional PE model, the typical holding period would be about 3-5 years. So, what we are seeing now is exits from that vintage. This is the first time that the Indian PEs have come to the stage where so many exits are happening or starting to happen. So while it may seem like a new wave, it's just a natural progression of the industry. I think we will see a lot of exits getting bunched up. Over time, exits will become a phenomenon just as regular as investments.
Do you think the buoyant stock markets could be influencing exits?
Well, you cannot deny that. With the Sensex wherever it is, the IPO route is gaining popularity as an exit route. But then PE exits are not driven as much by PE funds. They are equally, if not more, driven by the promoters too. Just to give you some data points, we had about nine PE-backed IPOs in the third quarter.
That said, we also clearly see a trend of greater secondary exits going forward. IPO exits are generally a function of how the markets are. So, if the markets tank tomorrow, IPO exits are sure to dry up. With plenty of dry powder, and the fact that a large number of Indian entrepreneurs do not have deep pockets to buyback the investors, secondaries are set to become a major source of exits in future. Presence of operating partners, who have spent a considerable amount of time with companies, making sure their business plans are being met, guiding them and steering them, on board too would enable this.
But with valuations being high, how difficult would it be to seal deals?
Agreed, the valuations are high today. For that matter, in some of the sectors, the valuations are prohibitive. So while it's very difficult to find something very cheap, this is where the whole operating partner model would help. Here, the PE funds would be able to pay the top dollar, but work with investee companies to make sure the business plans are put to action. That said, I do not think we are going to see cheap valuations in the Indian markets in a hurry. With plenty of dry powder and many PEs clamouring for good deals, valuations are likely to remain high.
PE funds, having paid the top dollar, will therefore have to either optimise the investment through operational means, adding value through their international experience and through operating partner expertise, or work with the company on cost and sales optimisation.
What trends have you seen in the fund raising side? Is it easier to raise funds now that successful exits have been made?
LPs (Limited Partners) are clearly looking for more experienced hands now. Two years ago one could be a total greenhorn and still raise money. It is difficult to do so in today's market. Funds ought to have investing and exits background with them. One should either have experience in today's market – know the Indian market like the back of your hand – or should have some sort of specialisation. That may explain why the special funds, with specific propositions, are being set up now. I think greenhorns' days are numbered.