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The rising stature of PE funds in the emerging markets indicates that it’s still not over for the PE sector, feels Gyanendra Kashyap...
Portrayed as the epitome of avarice, the private equity (PE) sector right now is witnessing a power play between two distinct polarities. While at one end (the developed nations) the sector is battling as the industry there can no more digest the large size deals (alas! the days of easy money making for the PE stalwarts are heading to a doomsday), on the other (the emerging economies) it offers them a huge untapped potential. At one pole even going public has not been able to restore the much needed momentum and confidence, whereas at the other it’s helping companies to increase their valuations even before they could enter the primary markets.
Well, the duality does not end here. While PE firms are forced to exit one set of market, they are reaping high returns on entering the other. Certainly this forces one to question, “Is it the end or the beginning of PE firms?” However, the answer to this candid question probably lies in the differentiation of the market dynamics.
No doubt, traditionally, PE firms in the European and US markets have worked in silence. But all thanks to the ongoing liquidity crunch, the ever tightening market for corporate debts and the roller coaster ride of the stock markets, the sector has suddenly hogged on to the lime light. And the bigwigs of the sector which include Kohlberg Kravis Roberts (KKR), Texas Pacific Group (TPG), Blackstone, Carlyle Group, Bain Capital, et al, who were at the centre of blockbuster buyouts almost on a daily basis, are seemingly finding the tough days ahead. It is feared that some of the big deals may either collapse or be at least renegotiated. Even the banks which had committed to loan the money are now pushing these firms to rethink the deals. For instance, banks including Citigroup, RBS, et al even tried to wriggle out their commitment to provide debt to Bain and its partners. This surely indicates that it’s no longer true for the companies in the West that going private (that is accepting PE participation) will shield them from the pressures of publicly listed business which inhibit the full extraction of potential returns. Moreover, as the PE firms themselves are going public and are accepting financial assistance from cash rich sovereign wealth funds (China Investment Corporation and Dubai International Capital have invested in Blackstone, Carlyle, et al), it makes more business sense for companies to dump PE investments. Perhaps the companies there have realised the simple fact that the only thing that they need to ponder over is to go public again. It is but apparent that the golden age of PE has come to an end in the West and the billionaire practitioners of the buyout business can only look fondly on their glorious past.
However, cut the picture across to the Asia-Pacific region, it’s India and China along with few others that seems to be providing a new hotbed to these distressed PE players. It is apparent that the beautiful period of PE investment that embellished the record books of the European and US corporations is in rough weather as the corporations there have become all the more cautious. On the contrary, the PE players focusing on Asia Pacific market maintain that they are sector agonistic and that their prime investments targets are the sectors spreading across communication, financial services, real estate, media, et al. Be it Blackstone, Temasek, NBC Universal, Warbug Pincus or Carlyle they for sure have mastered the art of treasure hunting. In fact, Indian companies by far have been the biggest beneficiaries in terms of PE investment in the region.
The burgeoning PE activity in the Indian market goes on to paint a very rosy picture of the sector. Avers Vincent Pun, Head of Research, AVCJ Research, “India has broken historical levels in the last two years. In terms of investments made, private equity investment in the country has jumped over 130% from a mere $7.48 billion in 2006 to a whopping $17.26 billion in 2007. Indian private equity funds also raised $6.38 billion in 2007, reporting a 6.6% increase from $5.98 billion in 2006.” So, going by the domestic and international capital flows into this asset class it can be logically inferred that the PE activity will definitely be at a high in 2008 and 2009. In fact the PE investments in India during the first half of 2008 (January to June) have been to the tune of $9.64 billion (233 deals). This, in volume terms is just 1% lower than the total investment in calendar year 2007. Even the number of deals has increased by over 15%. So one can well imagine in which direction the Indian PE scene is heading! But according to Arun Natrajan, CEO, Venture Intelligence, “The steep fall in the public markets has resulted in a marked decline in the number of PIPE, Pre-IPO and Late Stage investments during the latest quarter. However, “while power and telecom companies continue to attract large ticket investments, the positive surprise this year has been the re-emergence of Healthcare & Life Sciences on the radar screens of PE investors,” he quickly adds on.
In fact, in the present year, real estate (DLF-Symphony $450 million deal) and telecom (Aditya Birla Group and Providence Equity $640 million deal) together accounted for the 40% of the PE investments on volume basis. This surely indicates that the Asian tigers are on the roar and India is way ahead of its arch rival China. Thanks to the over 300 active PE funds in India, the PE investment in India is 30% more than that of China on an annualised basis. As a matter of fact $6.13 billion has been raised by India specific PE funds (3i, Axis, Baring, Lightspeed, Helion Ventures, Citigroup, et al) while funds to the tune of $16.9 billion has been raised by different global and emerging market funds (Morgan Stanley, Credit Suisse, GE, Ashmore, et al). It is interesting here to note that $4.04 billion has been raised by means of IPO in first half of 2008 while in the same period the PE investment has been to the tune of $9.64 billion (a thumping 240% lead). This clearly indicates the growing appetite for PE investments among Indian firms. However, the volatility in the capital market and the slowdown in the economy are leading to some negative trends (reduction of average deal size).
So, as PE firms loose their grip on the markets in the West, the emerging markets with Asia Pacific markets topping the chart are the new battlefields for them. Although individual markets have their inherent challenges, adopting a global strategy may be one approach to weathering the current economic slowdown. Though the sector may have lost a battle it is yet to lose the WAR!
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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