Pvt equity investors looking at ‘niche' sectors for better returns

Dissatisfied with the returns from traditional investment sectors, many private equity investors are turning to niche ‘ancillary' sectors which could give them better returns.

“Over the last two years, there has been equal number of investors looking at ancillary sectors as those looking at core sectors. Investors are looking to indentify unique business models within key sectors,” said Mr Rahul Gosain, Senior Analyst, Consulting Services Group, Kroll, a consultancy which has private equity clients.

With some sectors being less explored than the others, fund houses want to take a contrarian approach to identify profitable potential businesses. Some niche sectors which many PE investors are looking at are solid waste management, coal tar pitch, low cost housing and auto components.

“There is concern about project clearance in some of the broader sectors. Many smaller funds are looking at nascent sectors to invest in. Typical investments in these sectors are between $10 million and $15 million,” said Mr A. Murugappan, Managing Director and CEO, UTI Capital.

In the recent past, there have been many investments in the auto components space. There have been seven investments amounting to $134 million in 2011 (year-to-date); Navis Capital's investment of $105 million in Classic Stripes in April 2011 has been the top investment this year, showed data from Venture Intelligence.

“Investments in these niche sectors will definitely give good returns,” said Mr Nitin Deshmukh, CEO, Kotak Private Equity Group (KPEG). “Typical investments in these areas would be between Rs 100 crore and Rs 150 crore,” he said. The group has made a series of niche investments – in areas like aerospace components, an anti snake venom vaccine maker, clinical research services and home solutions.

Returns vary according to the pedigree of the business, the unique proposition it offers and the management. Returns are anywhere between 25 per cent and 30 per cent over a three-to-five year horizon, said investors. Exit is typically through selling off to another PE. There could be strategic arrangements in place too, with the promoters.

“Ancillary industries and specific verticals are much more attractive than larger sectors for investors. They may also be recession proof and so one does not have to worry about taking large bets,” said Mr Heramb R. Hajarnavis, Director, KKR India.

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