Baring Private Equity India is among the leading private equity players in the country, with nearly $ 1 billion of funds invested in a portfolio that spans sectors. In a recent interview, Mr Karthikeyan Ranganathan, Partner, Baring Private Equity India Pvt Ltd, shares his views on the PE industry's performance in 2010, the outlook for this year, prospects and Baring India's plans. Excerpts:

Could you give us an update on the PE industry?

It was a good year in 2010 for the PE industry. The general market was buoyant, approximately $8 billion came in as PE money to India last year, against $4 billion the previous year. From $20 billion in 2008 to $4 billion in 2009 to $8 billion in 2010. PE tends to be cyclical simply because there is always a herd mentality.

We did three transactions — Muthoot, Shilpa Medicare and Cethar Vessels. Cethar Vessels happened to be one of the largest transactions we have done. We manage nearly a $1 billion and in these three transactions we put out nearly $150 million, the year before would have been very minimal.

At some point in time, India became fashion in 2008, everybody wanted to put money in India, then things went bust. As private equity players, you tend to stay out when everybody comes in. When everybody comes in, the prices are driven up, the valuations tend to be high. In 2007 and 2008 we sat out of the market. Last year was a rather sane year. It had the right level of activity in terms of the amount of money coming in, the kind of transactions which were done, no silly money getting thrown out, no silly transactions getting done. I would categorise it that way.

What are initial signs for 2011?

We are seeing a lot of deal flow at this point of time. We are seeing transactions in power, infrastructure, pharma, but the bulk of it is in power and infrastructure.

What are the type of companies you invest in?

Mr Subburaj (Cethar Vessels) wants to build his company to a global scale. He has set out his company to be a globally competitive power equipment manufacturer in Tiruchi. To realise his vision of being truly global, he needed some more funding. That is where we filled in the gap. Both in terms of going global and Cethar Energy, which is the power generation vertical. That is where we came in. It is clearly growing faster than what he can fund. I am sure 30-40 per cent growth he can fund, but if you want to grow at 100 per cent per annum in the next couple of years, he needs external funding and that is where we came in.

Apart from funds, what is it exactly that you bring to a company like Cethar Vessels?

I will put it differently. We tend to be partners and that is our outlook. When I say partners, we take the ups and downs together. We stay invested for the long-term, we don't flip in 18 months. What we say is when we come into a business, what are the issues in the business, is it getting the right people, or getting the right customers. Whatever we can do in terms of getting new customers, new businesses we do.

How long would you stay invested in a company?

Our average holding period is over seven years. It is unusual for a PE investor. The first transaction we did in India, which is MphasiS BFL, we still hold a stake in the company, it is 13 years. We are long-term investors. When we tend to exit early, it is typically when we either think we have got the wrong thesis or when the relationship with the management is not working out as well as we would have wanted to. We try to prune our losers at the start and try to back the winners at the start itself.

A bulk of the PE/VC investment is going into the technology space. Cethar was one of the few investments in the manufacturing space. Is there a skew in that? Are funds available for the manufacturing sector?

I don't think so at all. Funds availability for the manufacturing is not an issue. If you take last year, a majority of the funds went into the power and infrastructure space. In terms of volume of transactions, it is still IT/ITeS. It is a bit of both. Infrastructure, somebody is in the business of setting up projects, the biggies will get bigger, simply because they have access to capital, access to the debt market because the banks know them and they will get the talent. It is inevitable. See, 10 or 15 people who are likely to get more and more capital all the time. That is the reason why you always find the same names at the end of the day. In IT/ITES, you will find lot of small technology companies could be the next Facebook, which is why you will find small amounts of money going into these companies. It is quite likely that the failure rate is also higher.

We typically invest in growth stage companies. That is not to say that we have not done the other types of investments. In fact, MphasiS was funded as a start up. Even our earlier investment in power, Auro Mira, was actually a start up investment. We literally seed funded the company.

What kind of multiples do you look for when you want to exit? Is there a norm that you have?

Private equity is the highest risk capital, which means you have to have the highest rates of return. In the high 20s is what everybody looks at.

Typically what stake would you take in the companies?

We have done minority investments, we have done majority investments. Auro Mira we started with a 90 per cent stake, we are happy doing that. Typically we don't do less than 10 per cent. It should be worth our while in terms of time and effort. In Cethar, we are a minority stake. In all the companies we invest, we have board representation.

Your experience in working with various promoters?

It is like a marriage. Has its ups and downs. You go through a rough patch. We typically try to ensure that we are partners. Which means that there is recognition that we are in it together.

If you invest in equity, what does he want. He wants to make the company bigger. It is always the right thing for me to do.

Related Topics
comment COMMENT NOW