Private Equity has expanded in India

Private equity breed disputes of late

Entrepreneurs gain by private equity participation. They get good inflows without any trouble. Their financial problems are taken care of. But at the same time, private equity does not come without conditions. Often, stringent conditions are imposed by the private equity participants in the projects to make the promoter uncomfortable. PE participants want Board room rights. They demand voting rights. They demand minimum returns in their investment. If they are investing through convertible debentures, they want the terms of conversion favourable to them. Their exit route is usually an IPO. But non-IPO exit routes have found a fancy in recent times. Promoters are forced to agree to the conditions stipulated by the private equity participants in order to secure financial participation for their projects. Now-a-days, private equity has become a growing cause of many disputes between promoters and the investors. Private equity funds have invested over $55 billion in Indian companies for the last five years. In the current year alone, investments are nearly $8 billion till now. The private equity funds bring technology (for example, Blackstone helped Intelenet build domain capabilities), management expertise and secure many high level contacts for the company they invest in. They get handsome return at the time of the IPO. But promoters accuse private equity investors as behaving like money lenders instead of risk sharers.

Foreign funds restrained

Recently, industry guidelines have restricted the exit option for foreign private equity funds. These guidelines have been formulated by the Department of Industrial Policy and Promotion (DIPP) on 30th September 2011. According to these guidelines, instruments with a built-in option of any type will not qualify as an eligible instrument of FDI. It will be simply treated as an External Commercial Borrowing (ECB). ECBs are subjected to limits and caps and will restrict the foreign private equity from exiting the venture. This move will discourage and slowdown participation of foreign private equity players in investing in Indian companies. Big private equity investors abroad like Actis 31, Bain & Co, Goldman Sachs and Blackstone will think twice before investing in an Indian company as their exit option is blocked for all practical purposes. Future FDI inflows will slowdown in India. But another view is that these so called private equity investments were nothing but transactions in real estate. RBI was concerned about this and hence the new rules.

More investments

Last month, JP Morgan Chase & Co invested $400 million in SKIL Infrastructure. Goldman Sachs invested Rs.1000 crore in ReNew Wind Power, promoted by Sumant Sinha. ChrystCapital sold 2.7% in Idea Cellular for $170 million and Warburg Pincus sold 2.28% stake in Kotak Mahindra Bank for $172 million. Loyalty Rewardz Management raised $4.4 million from the private equity fund Canaan Partners. Manish Kejriwal, the private equity bigwig, who spearheaded the growth of Temasek Holdings as senior managing director is going to quit the fund. He is going to partner another private equity bigwig Sunish Sharma, currently Managing Director of General Atlantic. Both of them are jointly planning for an entrepreneurial venture in the coming months.

Investment in healthcare sector

Olympus Capital Holdings is a private equity fund focused on Asia. It manages over $1.5 billion assets. It is planning to invest Rs.600 crore ($125 million) in hospital chain DM Healthcare. DM Healthcare is headed by Dubai-based Indian medical entrepreneur Azad Moopen and ex-CEO of Hinduja Healthcare, Anupam Verma. It has five hospitals, 38 medical centres and 75 pharmacies under the Aster brand. It is concentrated in Southern States in India. The fund from the private equity will be used to develop a national healthcare network headquartered in Mumbai. It is also developing a medical city in Kochi. It will boost up medical tourism from South-East Asia.

Blackstone, world’s biggest private equity fund

Blackstone group is the world’s biggest private equity firm going by assets. It is based in New York. It is also the most active private equity fund in the world. Its transactions have been valued at $20.3 billion. Stephen Schwarzman is the Chairman of the fund. It acquired Centro Properties Group’s American shopping malls for $9.4 billion in March. Avista Capital Partners comes second with a transaction amount of $14.2 billion. Third in the list is Nordic Capital of Sweden. Fourth in the list is Credit Suisse Group of Switzerland. Fifth in the list comes EQT Partners from Sweden. The biggest seller in private equity deals so far is Nordic Capital with a value of $14.1 billion. Worldwide, private equity transactions galloped by 51% to $287 billion over the corresponding period of the previous year. September transactions decreased by $8.2 billion from $29 billion in August. JP Morgan Chase handled over 50 deals this year so far valued at $56.8 billion. Goldman Sachs handled nearly 50 deals valued at $65 billion.

Private equity in Bollywood

For the first time, a Bollywood Hindi movie has been part funded and produced by a private equity firm Vistar Religare Film Fund, which has a corpus of Rs.200 crore. The film is Mausam. If the film becomes a box office hit, it could set a precedent for more participation from private equity funds in film industry. Luxury apparel sector is also luring private equity players. Rising consumer income and spending are the reasons behind this move. Industry is suggesting that private equity funds be allowed to invest up to 33% in equity shares or equity linked investments and debt instruments of listed companies. As the equity market is tumbling and companies are scared of coming out with an IPO, the promoters are opting for the safer haven of private equity funds for raising capital for their projects and working capital. This is the reason for the soft corner of the industry for the private equity of late.

Sequoia Capital tops the deals

Aditya Birla Capital Advisors, the private equity wing of the Aditya Birla Group has raised Rs.220 crore ($48 million) in its second private equity fund. There is a new found fancy towards farm and food companies by private equity funds. Investments have been made in several such companies like REI Agro, Prakash Snacks, Krishidhan Seeds, Bush Foods Overseas, Manpasand Foods and Sohanial Commodities. In the first six months of the current year 2011, private equity funds clinched 27 equity deals worth over $1 billion. Some of the companies where the private equity funds invested are Indusind Bank, Nagarjuna Construction, Ess Dee Aluminium, Shakti Pumps and Everest Kanto Cylinder. In the last six years, over 1500 companies received investments from private equity and venture capital funds. Together, their investments have crossed $50 billion. Sequoia Capital India topped the number of deals with 57 followed by International Finance Corporation with 53 deals, Bennett Coleman & Company Ltd with 52 deals, Citigroup Venture Capital with 39 deals and ICICI Venture with 32 deals.

Slum rehabilitation sees private equity participation

For the first time, a private equity invested in a slum rehabilitation project in Mumbai metropolitan region. IndiaReit invested Rs.200 crore in Worli project through a structured deal that enables the fund to get 100% return in the next four years upon project completion. Mumbai-based Impresario Entertainment & Hospitality Pvt Ltd raised Rs.48 crore from Mirah Hospitality and Food Solutions Pvt Ltd and Beacon India Private Equity. Impresario runs a chain of fine-dining restaurants. It operates 30 restaurants across eight cities under various brands like Smokehouse Grill, Café Mochia and Salt Water Café. 20 more outlets will be added. When private equity funds are helping so many ventures, it is ironical that a leading private equity investor Ved Prakash Arya was killed recently when a tree fell on him. Former Chairman of SEBI Damodaran has joined the Board of Aureos Capital, the emerging markets focused private equity fund. Aureos recently invested $21.5 million in Chennai based e-publisher Newgen Knowledge Works. It has announced its plans for a new $200 million India fund. Many of the private equity funds turned to realty projects for higher profits. Examples are SARE, FIRE Capital, Tishman Speyer, IREO, Millennium Spire and others. The investment in realty sector gives the private equity funds at least 20% higher return than in other sectors because of the fast appreciation of land and property. In February, Jeff Morgan Capital invested $320 million in Compact Disc India. In April, Warburg Pincus invested $318 million in Oceanus Real Estate. In February, Ascendas India invested $190 million in Phoenix Infocity. In March, Tata Realty invested $86 million in Peepul Tree Properties. In March, FMO invested $56 million in Kumar Urban Development. Actis, the private equity major, has a majority stake in Ahmedabad-based Sterling Hospitals.

 

Should not be permitted to invest in secondary markets

 

But other sectors are also getting their funds. Saif Partners invested $10 million in Gujarat-based juice manufacturing company Manpasand Beverages Ltd. There is even a demand for allowing private equity and venture capital funds to buy shares from the secondary market. This will defeat the very purpose of their existence. It is like permitting the hospital management to sell alcohol to the patients. Ranjan Pai and Mohandas Pai are to jointly float a private equity fund for Rs.450 crore. The former is the CEO of Manipal Education & Medical Group. The latter was till recently in Infosys Board as a Director.

SEBI seeks to control

SEBI’s AIF (Alternative Investment Funds) regulations seek to protect investors and growth of fund management industry. The regulator wants to enforce rules for disclosures and governance practices of private equity funds. Metals industry has attracted the attention of private equity funds due to their shortage. Metal sector private equity investment is set to double by this December. During the first half of 2011, the $30 billion Indian metals sector attracted private equity investments amounting $650 million. Metals and minerals sector account for 2.5% of India’s GDP. Apollo Global Management LP made the highest investment of $350 million in Welspun group in June. Halcyon France and Capital Advisors made $200 million deal for acquisition of two iron-ore mining firms. Reliance Equity Advisors acquired a minority stake in Bangalore-based Shankara Pipes for $27 million. Blackstone bought nearly 2% stakes in Monnet Ispat, an integrated coal-based sponge iron manufacturer for Rs.60 crore. But this was done through secondary market purchases.

Still more investments

India Equity Partners from New York is scouting for private equity investments in Indian food companies. In February, it purchased Tata-group controlled Innovative Foods, which sells the Sumeru brand of frozen parathas, peas and sea food products. L Capital Asia, the private equity fund of the luxury products group LVMH announced its first investment in India in July by picking up 25.5 per cent stake in Genesis Luxury Fashion Pvt Ltd for an undisclosed sum. Even in mergers and acquisitions, the role of private equity funds is acquiring importance. 89 mergers and acquisitions took place in India in 2011 with the backing of private equity funds. This was the highest in Asia. The future looks rosy with the private equity funds looking forward to invest $20 billion in India. Everybody seems to get funds from private equity. Kimaya Fashions has got Rs.60 crore from Franklin Templeton Private Equity Strategy. It valued the Mumbai-based fashion design wear retailer at Rs.300 crore. Private Equity is emerging as a distinct class in management of companies either directly or indirectly. Over the years, they have invested in many companies huge money. Moser Baer got $300 million from private equity funds in 2010. Gokaldas got $165 million in 2007, Visa Power secured $111 million recently, NCC got $111 million in 2007, Allcargo got $81 million in 2008, Gateway Rai got $68 million in 2009, MTAR got $65 million in 2007, Monnet Power got $60 million in 2010, Nuziveedu Seeds got $55 million in 2008, Jagran got $51 million in 2010, Emcure got $49 million in 2006, CMS got $40 million in 2008 and Fino got $35 million in 2011. Many of these companies have grown since then to become powerful entities. The private equity funds are eager to dip their fingers in the management of these companies also.

Non-IPO route for exit more popular

The private equity funds are adopting non-IPO exit routes also. In fact non-IPO exits outnumbered IPO exits for the year ended 30th June 2011. Blackstone sold its stake in Intelenet Global Services to Serco Group Plc in a deal valued at $634 million, rated as one of the biggest exits in the history of Indian private equity market. Speciality food company chain Cocoberry is negotiating with Dubai-based Abraaj Capital to rise about Rs.70 crore for a minority stake. If the funding is successful, Cocoberry will enter Middle East besides expanding its operations in India. N R Narayana Murthy’s (Infosys fame) Catamaran and Nexus Venture Partners have invested Rs.40 crore in Delhi-based online retail shop Bigshoebazaar India. Motilal Oswal Private Equity Advisors are planning to raise Rs.900 crore funds. The private equity fund plans to invest in sectors like FMCG, food, education and automobile ancillaries. Apollo Global Management and ICICI Venture are negotiating for a joint venture non-banking finance company. Indian companies are comfortable in dealing with local private equity funds rather than foreign entities.

Investments galore

Blackstone invested Rs.150 crore in FINO. Gujarat Venture Finance is planning to invest in infrastructure and energy sectors. Avigo PE is to take control of Spykar, a 19-year old apparel company in Mumbai. Malaysian PE Navis Capital Partners has picked up a majority stake in the automobile and graphics designer Classic Stripes for $100 million. The private equity fund also acquired a 62% stake in lubricants manufacturer Sah Petroleums. Sequoia Capital has planned to invest $30 million in Prakash Snacks, a FMCG company. Again, Narayana Murthy’s Catamaran and other private equity funds have invested Rs.20.5 crore in Mumbai-based healthcare service provider Wellspring Healthcare. For the private equity managers, companies that support mega construction will be the hot picks in the coming months. Blackstone is eyeing the German brand Jack Wolfskin. Westbridge Cap is planning to sell its stake in the Hyderabad-based technology firm Applabs. It holds about 50% stake in Applabs. Blackstone is acquiring Securitrans India Pvt Ltd for Rs.150 crore. TPG has picked up 15% stake in Shriram Properties. Indiareit and Ambience plan to jointly develop Gurgaon land bought from Aricent. TA Associates acquired 15% in Tage Industries for $40 million. Warburg Pincus is negotiating to invest Rs.150 crore in IndiaMART. Providence Equity Partners invested Rs.260 crore in UFO Moviez.

Exodus of top executives

There is an exodus of top executives from private equity funds. Anish Teli, executive director of Morgan Stanley private equity fund has quit. Leo Puri at Warburg Pincus India has quit. Rajeev Gupta of Carlyle left his post. Indian on{jcomments on}line and e-commerce ventures are also increasingly seeing private equity fund activities. Total investments in these sectors from the private equity funds have touched Rs.320 crore in the current year so far. E-commerce valuations are increasingly driven by private equity involvement.


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