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Archive for the ‘Corporate Finance’ Category

Shareholder Value Maximisation & Executive Pay hurting real returns, says paper

Posted by fairval on December 4, 2014

A  radical new paper is doing the rounds of the analyst community, and it makes some strongly counter-intuitive assertions. It says the focus on Shareholder Value Maximisation (SVM), which has caught on since the ’90s, is the dumbest idea ever, and it is screwing up real returns. The paper presents some impressive data to support this claim.

It further claims the focus on SVM has also distorted executive pay structures, and the two together are throttling real economy.

Attached here are 2 interesting charts.

 

Out of control Executive Pay

Out of control Executive Pay

The paper calls the pre-’90s era, the phase of ‘managerialism’. Quoting the paper – ‘During the era of managerialsim, the vast majority (i.e., over 90%) of the total compensation for CEOs came through salary and bonus. In the last two decades one can see the increasing dominance of stock-related pay. In the last decade some two-thirds of total CEO compensation has come through stock and options. This kind of compensation strucutre gives executives all of the upside and none of the downside of equity ownership. Effectively they create a heads I win, tails you lose situation.

Another reflection of the role of SVM in creating inequality can be seen by examining the ratio of CEO-to-worker compensation. Before you look at the evidence, ask yourself what you think that ratio is today and what you think is “fair.” A recent study by Kiatpongsan and Norton (2014) asked these exact questions. The average American thought the ratio was around 30x, and that “fair” would be around 7x.
The actual ratio is shown in Exhibit 16. It turns out the average American was off by an order to magnitude! If we measure CEO compensation including salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts then the ratio has increased from 20x in 1965 to a peak of 383x in 2000, and today sits somewhere just short of 300x!

The actual paper has lots more interesting stuff. For ex, as a pre-amble it trashes most holy cows of modern finance:  CAPM, Efficient Market Hypothesis, Beta, VaR, portfolio insurance, tail risk hedging, smart beta, leverage, structured finance products, benchmarks, hedge funds, risk premia, and risk parity to name but a few.

 

Posted in Anal(yst) Humour, Corporate Finance, The Science of Investing | Tagged: , , , , , , , , , , , , | 2 Comments »

Rs 50 cr to Rs 2 crore in 3 years

Posted by fairval on March 26, 2011

Future Capital seems to have written down valuation of its wealth management foray with Centrum (CCL) by 98%! This is from a news article today..

FCH will buy out 50% stake of FCH Centrum Wealth Managers from CCL at a consideration of Rs 1 crore. In 2008, FCH had invested 50% stake in this joint venture with CCL for Rs 25 crore. Post this transaction, FCH will hold 100% of this entity.

Though, there could be some accounting trick here. FCH had 2 JVs with Centrum. In the other JV, for forex, CCL is buying out FCH. In this JV, Centrum Capital will buy 50% stake currently held by FCH in the entity FCH Centrum Direct for a consideration of Rs 100 crore. In 2008, FCH had invested Rs 75 crore for 50% stake in this joint venture.

So in 2008, FCH had invested a total of Rs 100 crore. It is getting net Rs 99 crore back, and starting with a Rs 2 cr valuation for its wealth biz

Posted in Corporate Finance | Leave a Comment »

Fund Raising by India Inc in 2009

Posted by fairval on December 14, 2009

Data by SMC Cap showing Fund Raining in 2009

Some data onfund raising from a note from Jaganathan of SMC (must say he is a smart marketer).

The QIP route has proved quite popular, which is one reason perhaps why Rights has got affected. What is also interesting is how ADR/GDR have got practically dried up in the last 2 years.

2010 should see atleast 50% jump in fund collections. Both IPOs and ADR/GDR may see a rise.

Posted in Corporate Finance, Data, Markets | Tagged: | 1 Comment »

Bharti-MTN will exceed Vodafone’s emerging market presence

Posted by fairval on May 22, 2008


As with most large M&A deals attempted with Indian companies, the general reaction from the broking community to the Bharti-MTN deal has been muted. At one extreme is a Kotak report which says there is little synergy or strategic benefit. Kotak has a ‘reduce’ rating on Bharti. An Edelweiss report talks of likely savings through bulk sourcing of equipment/handsets for the combined entity. While the report concedes that ‘the deal could improve MTN’s operational efficiency via possible emulation of Bharti’s lower cost structure’ it goes on to say that there may not be any other significant operational synergies initially from the deal.

A Merrill report is a little more positive. Avoiding standard management graduate-lingo of ‘synergy’ or ‘strategy’, in a rather workman like fashion, it points to a ‘strong fitment with Bharti (for MTN) if deal materializes’. By ‘fitment’ it probably alludes to the fact that Bharti is largely in one country – India – and while MTN is in 21 countries, there is no overlap. Both companies have low leverage with net debt/EBITDA, says the Merrill report. Forecast strong growth for both companiess should facilitate quick easing of any near-term stress on valuations, says the report.

A report by Enam avoids views altogether, and sticks to facts. MTN has its own captive network – the report informs. ‘Bharti could pioneer its outsourcing model for MTN as well. This would involve acquisition of management control & it may take a few quarters for the benefits from this to accrue’.

While most broker reports don’t quite see any strategic (or operational) benefit, whenever a company goes for an acquisition of this size – or of any size for that matter – the management must have seen some benefit. This deal seems to be mainly about acquiring customers, and as one report says ‘geographical diversification’. MTN is not a technology supplier, and in any case, Bharti’s business model believes in outsourcing technology. Sunil Mittal seems to see Bharti mainly as a brand. The way Sunil Mittal has evolved Bharti, it is now largely a customer acquisition and servicing company. Other than the customer, almost everything else is non-core for Bharti. And while implementing this over the years, Bharti has managed to create an extremely cost efficient operation.

An idea of how cost efficient Bharti is can be seen from comparing with MTN. While both MTN and Bharti have similar EBIDTA margin of around 45%, Bharti’s revenue per customer – ARPU in telecom parlance – is only $9, about 45% lower than MTN’s ARPU of $16. MTN spends $9 per month per customer in core operational costs, while Bharti spends only $5. While Bharti may not be able to knock off the entire $4 difference, but there seems to be scope for taking costs out. Even if Bharti takes out $1 per customer from MTN’s cost structure, that is almost $1bn of cost savings per annum.
However, this deal is not about restructuring MTN’s cost structure. It is more about its customer base. Perhaps Bharti feels it could reduce prices and increase market penetration in countries where MTN operations. Another way to get some sense of the merger is to compare the combined entity with Vodafone. The company entity will exceed Vodafone’s presence in emerging markets. Vodafone had around 112 million customers in its emerging europe, and asia-pacific region spread over 11 countries. This is its fastest growing region, growing at around 18-20% organically.

In recent years, Vodafone has tried to diversify away from its European base, since there it gets barely 10% annual growth in customer base. In 2007, Vodafone’s total customer base grew 38%, large part of which came from its acquisition of Hutch’s operations in India. If you remove Hutch from Vodafone’s number, the rest of it grew only 13% in customer numbers. On the other hand, Bharti grew 73% and MTN grew 53% last year, mostly organically. The Bharti-MTN combine will have a 130 million customer base which grew 60% last year, a terrific rate compared the more pedestrian growth of Vodafone.

The world’s largest emerging market company remains China Mobile, which has over 400 million customers, though only in one country.

Posted in Corporate Finance | Leave a Comment »

Education – a missing pie in VC/PE action

Posted by fairval on April 21, 2008

While current sector allocation of VC/PE investment reflects India’s needs, education is one big sector to have missed out so far

While the VC/PE business has matured a lot in recent years, it is still instructive to see the dramatic transformation which has occurred in terms of where investments are going. Completely different sectors are soaking in money in 2008, compared to even 2-3 years ago.
The industry started off in the late’90s, when the first foreign firms started looking at India. The new entrants focused at IT and internet, much in line with the craze in US at that time. Quite a few of the early deals didn’t work out. The business really picked up only when investors broadened their horizons started looking at non-tech sectors like infrastructure, capital goods, financial services, retail and so on.
In the last three months, for example, infrastructure and real estate accounted for 30% of PE investments. Energy, telecom, media/entertainment, financial services, and manufacturing followed. Between them, these six sectors mentioned here accounted for 90% of all PE investments over the last three months. While this data may not be entirely accurate – some deals don’t report amount invested – the point here is, traditional VC/PE sectors like technology, internet, healthcare have perhaps accounted for less than 10% of investments this year so far. A clarification here – the distribution could look very different in the angel/VC space. PE deals tends to be large, and also focus on growth stage, rather than early stage. So the overall data here is perhaps coloured by trends in PE space.
The sectoral break up in 2008 seems to be vastly different even from say 2006, when IT/ITES accounted for about 20% of VC/PE money. Power/energy and real estate/infra barely accounted for 10% put together. So what does this all mean?
One inference – India is building up for the future. In terms of capital allocation, it seems about right that basic areas like infrastructure, real estate, energy, telecom get the largest share of investments; following by second order needs like financial services, logistics and manufacturing. Media/entertainment, internet, retail/consumer are perhaps third order needs, in a country like India.
Some of the basic sectors seem set to pull in a lot more money going forward, if the announcements in April so far are anything to go by. About $5bn of new funds have been announced in April so far, around 70% this dedicated money for real estate/infra. Some of the other money is sector agnostic, like Azim Premji’s newly announced $1bn fund – some of that could also fund infrastructure and energy.
However, PE investors are supposedly represent smart money – so this sector allocation could change just as rapidly a few quarters into the future.
For example, one sector which really hasn’t attracted meaningful VC/PE investment is education. A recent report by CLSA points out that private sector business in education is around $40bn. If CLSA estimate is correct, this makes education bigger than the healthcare sector, and almost as big as IT/ITES sector – the tradition favorites of VC/PE investors.
CLSA says – citing a household survey it seems to have commissioned – that education is the second largest item of middle-class household expenditure in India, after food. While a middle class household spends around 25% of monthly budget on food, around 9% goes to education, compared to 3% on healthcare. These ratios are very different from national averages, since CLSA’s sample set is intentionally different. CLSA has attempted to find the demand patterns of India’s consuming class.
Again, if this data is robust, it points to a great potential of education to throw up large businesses. One problem with education is that while private enterprises are there in basic schooling, and post secondary courses like engineering or management, most of these have been registered as trusts. There are ways to work around these restrictions – like for example, forming an operating company which the trust outsources or contracts out activities to. Outside of the formal schooling and graduation system, there could be number of opportunities in tuitions, assessments, vocational courses, e-enabling education, remote delivery, continuing education to name a few possibilities.

Posted in Corporate Finance, Education, PE/VC | Leave a Comment »

Big deals remain scarce

Posted by fairval on April 14, 2008

If you can’t build it, but it – i.e to do big deals, PE investors will have to think differently.

A Reuter’s report last Friday said the Asia head of a PE outfit was leaving within a year of joining. This firm apparently had has had difficulty closing large buyouts amid high prices for deals and a dearth of sellers in markets like China and India. Compared with rivals such as The Carlyle Group and Warburg Pincus, this firm arrived late to Asia. The report says the firm found that competition for assets was fierce.
While not exactly on this degree, but there are parallels to this story in India. The surge in Indian PE/VC deal market in the last 24 months has attracted many new foreign players.

Most PE or VC firms, which arrived in India in last 12 months, are perhaps finding the going a little tough. There seem to be quite a few firms which have done no deals yet, or at best 1-2 deals in say 12 months of being active in India. In other words, there are many of these firms are as yet finding their way around in the Indian markets.

A look at data would also give some indication. In the first quarter of 2008 (Jan-Mar), private equity firms invested about $3.3 billion in 97 deals according to Venture Intelligence. In Jan-Mar 2007, there were 101 deals. So while the number of PE firms is perhaps up 15-20% in the same period, the number of deals going around is roughly the same.

The learning here is simple – traditional PE models which apply in say US or Europe may not always work in India. For example, it is hard to do large deals in India, for more than one reasons – supply remains low, consequently valuations are often an issue. Deals like buyouts are still harder.

In Jan-Mar’08, there were perhaps 5-6 deals greater than $100mn, if you ignore real estate SPV kind of deals. There was perhaps only one buyout, if you count Paras, where Actis has reportedly upped its stake to 60%. So if you are a PE firm keen on large deals or majority ownership, what do you do?

While one answer would simply be – bide your time, be content do none or 1 deal a year if you don’t get the right deal and right valuations, and don’t bother about opening a local office. The other may be to try a different route of ownership – incubate firms which can quickly grow to reasonable size. In an economy like India, which will grow in the range of 7-10% over 1-2 decades, it may be possible to build multi-billion dollar businesses from scratch. So if you can’t buy it, build it.
The recent IPL franchise auction was one area for PE funds to get in at startup and build a large operation ground up. Recent reports have indicated that winners of IPL franchises are being chased by PE funds. Some deals will sure be announced in the coming months. Yet, the price at which any investment will happen now will be vastly different now. Consider this scenario – a PE investor puts together a team of operating types, and enters at bidding stage itself. The potential for wealth creation would be far greater in this route.

The recent auctioning for telecom licences that saw groups like Videocon, Unitech and dozens of other apply, was another example. Many of the new applicants are essentially acting as investors – they are in it more for capital gains, than to build and earn operating income. Their aim is – get the license, and offload equity to actual operating companies, multiply valuations by getting PE investors in, and exit at some point with hefty capital gains. In telecom infrastructure business, there is an example of company being built ground up by a PE investor, with majority ownership.

An example of building rapid value in a short period of time is Lemon Tree Hotels, which started by a first generation entrepreneur in 2002. Last week saw Shinsei Bank and Kotak’s PE arm pay $30mn for a 5.9% stake. This values the company at $500mn, or around Rs 2000 crore. This appears to makes Lemon Tree the third most valuable hotel company in India, behind only the Tata owned Indian Hotels, with a market cap of around 8000 cr or around $2000mn, and East India Hotels, with a market cap of Rs 5500 crore roughly $1350mn. Much older hotel chain Hotel Leela Venture is valued at $380mn and Asian Hotels at $280mn.

Warburg shows it remains the master of big ticket investing in India. It took a 27% stake in Lemon Tree in July’06 for Rs 210 crore, or a valuation of Rs 800 crore. At that point Lemon Tree had only 2 properties actually operational. Warburg’s stake could now be worth Rs 540 crore, or more than double in less than 2 years, at an IRR of around 65%.

Posted in Corporate Finance, PE/VC | 1 Comment »

Emaar fiasco – End of Real Estate Party?

Posted by fairval on February 9, 2008

Private equity and foreign floats may replace domestic markets for the next few months, while real estate stocks are clearly in for some rough times

Withdrawal of two IPOs, that too large IPOs, once again proved that markets are a great leveler. They can swing from exuberance to pessimism in no time. After more than 8-10 months of madness, reality struck with a vengeance, and unfortunately so for Wockhardt Hospitals and Emaar MGF.

The issues in question were perhaps no more aggressively priced than some of the other recent IPOs. The Reliance Power IPO for example was far more aggressively priced. Even the Future Capital IPO wasn’t cheap by any yardstick. The promoters and merchant bankers of Emaar MGF and Wockhardt Hospital IPOs were no more greedy than others who have tapped the market in recent times. These IPOs were simply unfortunate to come along at a time when globally investors are feeling extremely jittery and risk averse.

Let’s look at the implications. Withdrawal of issues clearly has the potential to delay capital investment plans not only of the two companies in question, but of others lined up to tap the markets in the next few months. It is quite possible that over 2008, Indian IPO markets see far less capital raising then originally envisaged. Emaar’s IPO itself was planning to raise around $1.5bn. Let’s say equity capital raising gets impacted by $3-5bn. Count the debt this equity may have supported, and capital available to companies could easily have reduced by around $10bn, just because of events of last week. Next 1-2 months will be crucial. If this temporary setback assumes larger proportions, then it could start having ripple effects on the broader economic scenario.

Amongst possible ripple effects is dip in business sentiment. Investment activity in any economy is highly correlated to business confidence indices. If promoters start developing cold feet, capex plans can start getting postponed. Consumer demand is already weak at the moment, last thing Indian economy needs is a dip in investments.
Correction in real estate sector is another likely possibility. Real estate companies may face a double whammy. As it is, consumer demand has slowed down, since prices are unrealistic both in housing and commercial real estate. Builders have been able to hold prices, since they have had abundant access to capital in the last 1-2 years. In other words, they have had the ability to hold stock. Now, they may face capital starvation for some time.

One can safely assume that no real estate company would dare to tap domestic capital markets for the next 3-6 months, till a credible sector leader tests the market and brings investor confidence back to the sector. Most real estate companies are highly committed at this point. Their sky high valuations are built on ultra-aggressive growth projections, to deliver which have huge need for capital. If, due to the Emaar-MGF fiasco, these companies get temporarily starved of capital, then their bargaining power vis-à-vis consumer may come down sharply. While this may lead to a massacre in real estate stocks, for the real economy, it will be good. Lower price for consumers of housing and commercial real estate is far more important than high prices for investors in real estate stocks.

What next? On the optimistic side, these two IPO slip ups may not cause any harm to the issuers, or others wanting to raise capital in the short run. Domestic capital markets are no longer the main mode of equity capital raising for Indian issuers anyways. There are multiple foreign public markets – like the usual ADR/GDR, plus AIM, Singapore, Dubai to name a few – where Indian promoters can raise capital. Fund raising from private equity has also exceeded Indian public markets for the last 2 years.

The likely scenario in the next 3-6 months is that promoters will once again ignore domestic public markets for private equity and foreign floats. The budget may have some impact on investor sentiment as well.

Posted in Corporate Finance, Real Estate / Construction | Leave a Comment »

The need for Entreprenuer-Brand

Posted by fairval on January 21, 2008

The success of Reliance Power and Future Capital underscores the role of the ‘entrepreneur-brand’ in a company’s success.

2008 has started off an a dichotomous note. While secondary markets are shaky, the primary market has set off on a scorching note. Both Reliance Power and Future Capital have got strong response from retail investors, despite shaky secondary market conditions. Both are also businesses with a lot of future promise built into issue pricing.
The success of these two IPOs has once again busted the myth that Indian retail investor has no appetite for stock markets and is scared of investing in equities.
Reliance Power certainly overturns all notions of risk appetite of retail investors, or for that matter, institutional investors. The massive Rs 11,700 crore R Power IPO got oversubscribed atleast 72 times, with the retail portion getting subscribed 14 times. The retail portion was 30% of the IPO. This means the retail portion itself generated subscription of around Rs 50,000 crore. This is higher than from the money actually raised by IPOs last year from domestic markets.
The Future Capital issue, which closed just a few days before the R Power issue, wasn’t affected by market turmoil either. It got overall subscription of around 132 times, with the retail portion getting a 54 times oversubscription. This means the retail portion collected around Rs 8150 crore.
This goes to show one thing – retail investors do have the appetite to dish it out. But what was it about these two IPOs which prompted such frenzied response?
In R Power’s case, you could say the large capex required on the power sector is the big explanation. But this explanation falls flat if you compare valuations of R Power with other power generators. R Power asked for a valuation of close to $30bn. The grey market premium suggests a listing price of around $40bn. NTPC, the country’s largest power generation company, with an installed capacity of 28,000 MW gets a valuation of Rs 210,000 crore or around $52bn. R Power has no generation capacity. It will get to NTPC’s current capacity only by 2017 or so, says a research report by HDFC Securities. By that time NTPC may have doubled its current capacity. Citigroup had a ‘sell’ recommendation on NTPC in a report in Nov’07. So clearly, retail investors have given hugely disproportionate valuation to R Power.
Future Capital (FCL) also seems to have benefited from a future promise. FCL asked for a valuation of around $1.2bn. It currently is a private equity fund manager, where it helps manage a funds of size around $1bn. ILFS Investment Managers (IIML), a listed company, is a PE fund manager with a similar size of business, and much longer track record. IIML has a market cap of around Rs 900 crore or $230mn, one fifth of FCL. FCL intends to build a retail finance, but this activity is currently miniscule.
The success of these issues seems to demonstrate that IPOs often sell more on personality than on just the sector story or the company. Both the Ambani and Biyani names are now brands, with direct connect into investor psyches. The ‘entrepreneur-brand’ factor, is perhaps the biggest explanation behind this investor frenzy.
The point to ponder for other entrepreneurs is this – are you okay with being a faceless name or should you be a brand yourself? Good performance will also get you the capital, no doubt. However, good performance combined with direct investor-connect, which an entrepreneur-brand has, will also get you capital at aggressive valuations.
Of course, not all entrepreneurs need to or may want to do this. A good sector or company story will also though mostly see an IPO through, as the success of other recent IPOs like BGR Energy Systems or Transformers and Rectifiers India demonstrates. Both these issues, which came in Dec’07 are trading at significant premias to issue price.

Posted in Corporate Finance | Leave a Comment »

The ‘India Management Story’

Posted by fairval on January 5, 2008

Tata Jaguar deal shows Indian markets may have a new theme – ‘India management story’

Tatas finally got the expected result in their chase for the two marquee automobile brands – Land Rover and Jagaur. The bid itself reaffirmed what Deal Digest has written earlier – Indian managements have become increasingly confident of their own skills.

While Tatas were successful in this bid, their efforts in buying Orient Express Hotels were rebuffed, with incumbent owners raising issues about being owned by an Indian company. It seems global perception hasn’t really caught up with what Indian managements think of themselves.

In fact the biggest developing investment theme about India and Indian companies is this – ‘The India management story’. Translated this means – bet on Indian companies simply for superior management skills.

Brokerages and funds love investment themes. There have been three dominant themes about investing in India – consumer, outsourcing and more recently infrastructure.
The consumer theme is driven by India’s increasingly affluent consumer class, and it remains a strong theme. While till the ‘90s it drove FMCG stocks, in recent years, it threw up big telecom companies. Next it will throw up retailers and financial powerhouses, spanning broking, asset management and insurance. One could say the real estate story, which has thrown up the likes of DLF and Unitech, are also driven by the consumption theme. The outsourcing theme, which was about more labour arbitrage, is fading a bit, given the rising costs of doing business in India. So the Infys and Wipros aren’t the most valued Indian companies any more. The infra theme is strong, and is for example, behind the birth of a company like Reliance Power, which aims to get a valuation of around $25bn. That must be some sort of a record for a start up. Infra theme has also thrown the likes of GVK, GMR, ABG and so on.

To all this, it is time analysts added a fourth, and potentially most potent story – India management/entrepreneur story. And it is not just large corporate houses like the Tatas which are betting on Indian management and entrepreneurial abilities. The likes of Suzlon, Aban, Punj to name some, are first generation entrepreneurs thinking global markets from a very early stage. And they are beginning to show that Indian managements can often create superior value compared to western managements.

Take the case of Suzlon. It listed its subsidiary Hansen Transmission International on the London Stock Exchange in December. Hansen listed at a valuation of around 1.6 billion euros. Suzlon had acquired 100% of Hansen, which makes gearboxes for windmills, in May’06 for around 640 mn euros. This means that under the new management, Hansen appreciated 2.5 times in around 18 months. Looking at Hansen financials, while there is no dramatic difference in P&L, there is a sharp change in two areas – cash flow from operations and capex. Hansen appears to have benefited in two areas – working capital management and growth. Since its takeover, Suzlon has announced plans to hike Hansen’s capacity 4-fold. Hansen’s current capacity was only in Europe. A lot of expansion will come in India and China, expanding the horizons of its erstwhile European management.

There will be more such examples in coming months, where Indian managements will have actually demonstrated more value creation skills than global peers. What is clear is that entrepreneurs and managements are raring for that challenge.

As Indian companies make more more global bids and acquire assets like the Tatas have done, it will be hard to bind down these companies to any India specific investment theme. In an acquisition like that of Land Rover and Jag, neither markets not value chain is India related. All the Indian acquirer is bringing to the table is management skills. Global investors will back such deals only in they believe in the ‘India management story’. It is incumbent more than ever now, for Indian managements, and analysts of Indian companies, to build such a story, provided it exists.

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PEs need to create deals

Posted by fairval on January 5, 2008

Fund managers will have create deals and bring value to stay ahead in the overcrowding PE/VC market in 2008

2007 will end as a remarkable year for the PE business in India. Recent reports have suggested that PE business may have crossed $17bn for the year, more than double of $7.5 bn done in 2006. India has also reportedly overtaken China in PE stakes. According to media reports, till Oct’07, India had seen around $5bn more of deals as compared to China.

PE fund raising has matched or exceeded the public market – IPO/FPO – route in recent years. In 2006, fund raising from PEs had exceeded domestic IPOs and FPOs by around 50%. In 2007, IPO/FPO route almost tripled to over Rs 73,000 crore ($18bn). So while PE could not exceed domestic public markets, it still nearly matched it. PE has clearly emerged a credible alternative to IPOs/FPOs for late stage and listed companies.

After all these big and excellent numbers, where do we go in 2008?
First point – clearly no one expects any slowdowns. These numbers can only grow. “Investors are very bullish on the India story. More money is clearly headed India’s way” says Sarath Naru, managing partner, Venture East. “New funds are still entering, and India allocations of global funds continue to increase” says Srini Vudayagiri, managing director, Lightspeed Venture Partners.

A recent report by Evalueserve had indicated, there are around 400 PE funds in India now, which already have commitment of close to $50bn to invest in India. While fund managers think active funds are less, the consensus seems to be – active funds and moneys available will go up in 2008. So is there enough for everyone?

In 2007, around 400 deals happened, from around 300 in 2006, a growth of 33%. Everyone agrees there will be more deals in 2008. Let’s work some numbers. Most funds will do atleast 3-4 deals a year. So even if number of deals grows 50% to say 600 in 2007, and each fund does 3 on an average, that’s enough space for 200 funds.
“Overcrowding is already happening” says Naru. “This is more so in late stage deals, where ticket sizes are $15 or more” says Nilesh Mehta, managing partner, Aureos India Advisors. This has two consequences – valuation will go up, and questionable deals will get done.

There will be various ways to deal with this. If you do deals through intermediaries, and all you bring to the table is money, then you are going to have to bid up the price and sacrifice returns. “One way to have proprietary deal flow is to create deals” says Naru. Can you for example bring two companies together and fund the acquisition? Funds will have to have deep sector or local knowledge and networking for this. “Intermediaries won’t normally think of such deals” says Naru.
“You will have to be able to bring value to deals” says Mehta. This can be either through opening doors for new business, or synergies with a similar company in your global portfolio. Blackstone, when it bought Intelenet last year, reportedly promised to give business to it as well. Global funds also fund it easier to deals when they have done a similar deal in US or China.

Funds may have to specialize and build sector focus, agree most PEs. That would be the only way to bring added value to deals.

There is less competition in early and seed stage. “Less than 10 crore deal size is a different market altogether” says Rajesh Jain, founder of Emergic Venture Capital. Rajesh, who has perhaps the most well rounded portfolio of early stage digital plays says while there are less players in VC and angel space, quality, fundable deals are the issue here. “Entrepreneurs need to be more creative to build scale” he says. In both the internet and mobile space, entrepreneurs aren’t coming up with credible businesses which will gel with Indian customers.

Among sectors, infrastructure and real estate will perhaps see a lot of flows. “Power, water and waste management could see large deals” says Srini. In mid size deals, scalable consumer plays remain the hottest area in mid size deals, while outsourcing led businesses have lost some luster. In consumer plays, healthcare, education, media and entertainment are top of the list. “Healthcare is a huge opportunity. Preventive healthcare does not exist in India” says Srini. In IT, now the focus is more on domestic plays. Funds are keen on companies trying to cater to Indian SMEs, preferably using software as a service (SaaS) concept.

An Indian fund may break into the league of top 50 global funds in 2008. An AUM of around $4bn can achieve that goal, and ICICI Ventures could get there in 2008. It has over $2bn under management currently, and wants to reach an AUM of $10bn by 2010
And finally, funds will have to work harder. Doing deals through intermediaries will clearly not work. The smart fund managers will get out of their offices and meet more companies, if they are to close deals in 2008.

Posted in Corporate Finance, PE/VC | Leave a Comment »