Strategies for private equity investments in India

Abstract

The objective of doing this CCS is to gain an understanding of the PE industry in India, who the players are, and what sectors to they typically invest in. Also, PE investments in India are a recent phenomena, and the recent gains of the industry have also been a function of the generally buoyant capital market. It is now that some macroeconomic instability has started creeping in, and it would be of interest to see how PE firms perform in this environment. To that extent, we have tried to define a set of strategies to follow, and a set of competencies that they need to possess, to be successful in an emerging economy like India. We also built on our understanding by looking at the historical data, of all the deals that have taken place in the last five years, and try and understand which sectors have been the preferred investment hotspots. Further, we drilled down and tried to ascertain the reasons for the popularity of those sectors at that point of time. We also tried to understand if external factors have impacted a sector to an extent that the sector itself went out of fashion. Using this analysis and studying the trends of prior PE investments, we have tried to predict what could be the next wave of investments and in which sectors. In some sectors we noticed very clear temporal trends (such as auto ancillaries and pharma) for which we could corroborate some macro economic factors with the incidence of PE activity in that sector. In some sectors, there were minor trends, but no clear major patterns. In those cases, we have tried to arrive at a set of predictions, subject to occurrence of certain conditions in the environment. In case of auto ancillaries, we were able to identify a distinct trend wherein the stake taken was coming down even as the size of deals was increasing, clearly indicating that PE firms are moving away from small part manufacturers which are riskier and not much scalable to big manufacturers who are less risky in an unstable environment. Similarly, in Pharma we could spot trends of movement towards smaller CRAMS manufacturers and to pathology labs, until now a highly disorganized sector. Most of this analysis was done with secondary data. We built up a database of all the deals conducted in the last 5 years, and populated a database with the stake, deal value and IRR (if there has been an exit).After conducting the analysis, we came up with a set of hypotheses for each of the sectors, and also regarding some general trends that we observed in the PE industry. In the next phase of our project, we corroborated some of these findings with the professionals in the PE industry, and also gained a further understanding of how their respective firms operate in the market. Based on their feedback and our own findings, we have tried to arrive at a set of consistent strategies and competencies which would be required by a PE firm to be successful in India. Some of these competencies point towards relationship building as one of the most significant ingredients of success. Also, since the Indian market is not as well developed, the need to filter news from rumours is extra important, which directly implies that diligence has to be more forensic here. We have elaborated upon these and other such findings from our project.