Channel: Investment

22 April, 2010
UK PE funds conspicuous by their absence in India's largest PE deal
On March 22, I sat next to next Ali Abbas Syed, Director of Zeus Capital, on the same panel

On March 22nd 2010 I sat next to next Ali Abbas Syed, Director of Zeus Capital, on the same panel of an Indian Infrastructure Finance conference organised in London by SJ Berwin LLP and eti Dynamics Ltd.
Earlier that evening I got chatting with Ali who was (and still is) quite elated by his firm’s role of the sole advisor to Asian Genco that had in the previous week received equity injection of USD 425 million from six major private equity funds. Asian Genco is an India focused infrastructure development Company with various assets across the power sector in India.  Its most valuable asset has to be the 1,200 MW Teesta III hydel power plant, which when completed will be the largest hydro sector project development by a private company.
This deal included a consortium of six major investors led by Morgan Stanley Infrastructure Partners. Other funds in the consortium are General Atlantic LLC, Goldman Sachs Investment Management, Norwest Venture Partners, Everstone Capital and PTC India (Power Trading Corporation).
This clearly is a blockbuster deal that India has witnessed to date. However one major point troubled me quite a bit – why was there no major UK based PE funds in the consortium which is clearly led by eminent American funds.
Is there some kind of trans-Atlantic rivalry at play here? I asked Ali and subsequently Shaurya Doval, Zeus’s Director based in India, and their answer simply was that the issue lies not in the origins of a fund but the fundamental strategy of the fund. India is at a stage where its companies require copious amounts of venture development and growth capital. They quoted the recently released figures by Goldman Sachs and separately by the Indian Government that India must spend upwards of USD 1trillion in the infrastructure sectors over the next 5-7 years if it needs to sustain its growth rate.
Their main observation is that PE firms in Europe generally generate returns through capital restructuring or through buyouts. Whereas India warrants investment concentration on the early stage opportunities. This is even more pertinent in the infrastructure asset class. In Europe whilst some PE funds are participating in the infrastructure asset class, their entry into this market, relatively speaking is fairly recent. For decades this segment has largely been the playground of pension and insurance funds that invest in such an asset classes for capital preservation and buying inflation to create a better asset-liability match.
But India today and for the next few years offers a once in a lifetime opportunity for PE funds to invest in the infrastructure asset class across the board ranging from Core sectors such as power, roads, transport to social asset classes such as healthcare, education, environment.  Other service economy infrastructure sectors like telecom, ISPs, financial payment gateways also offer massive opportunities.
Of late there has been a surge in global PE funds entering the Indian market in search for this growth. It is estimated that there are now over 300 private equity funds in the hunt for investment opportunities in India. But only a handful of these hail from the UK.
Why is this the case? I posed the same question to Gaurav Mehta who previously worked in the clean-tech and renewable business of General Atlantic Partners in the UK.  He has since taken the entrepreneurial road and is currently building a rural sales and marketing network in India to focus on the “bottom-billion / rural segment”. His analysis of the situation is that firstly the size of the deals – pointing to the sweet spot between USD 10-15mn per deal. Thus a USD 100mn fund can deliver 6-8 transactions in its investment period for which the fund managers will have to find and evaluate at least a 75-100 transactions.  Therefore large buyout type structures are unlikely to provide the right framework to succeed in India.
Secondly the people who will originate and deliver on these transactions need to be based on the ground in India with great appreciation for regional differences as India is not a homogenous nation. So unless a fund has decided that India is of strategic importance for them and has created a great team on the ground they are likely to find the road extremely rocky. Operating out of plush Mayfair offices is not an option at all, unless there is significant foreign expertise required on an ongoing basis which may only be needed in areas such as renewable energy or high end innovation.
A number of funds make the mistake of going after companies that are already national brand names who will but naturally command a premium. Although there is definitely an opportunity at that level, it is however only for the largest of the funds that are able to write cheques north of USD 100mn per transaction. Also there are only a handful of such companies that can command a valuation in billions of dollars to get a capital injection in hundreds of millions as was seen in the Asian Genco transaction.
However transactions like Asian Genco are not out there for the taking. They need to be created over a long period of time. Advisors like Zeus Capital or the fund managers almost need to become part of the company management to be able to create a structure that will deliver a win-win result for everyone.
This is the most fundamental difference between the PE model that will be successful in India to what is prevalent in Europe claim Ali Abbas Syed and Shaurya Doval of Zeus Capital. Those who are able to mould their strategies to suit the local conditions and are flexible enough in their approach will find deals like Asian Genco in India and for the traditionalists the market will continue to prove difficult and fraught with uncertainties.
Perhaps this is where the cultural differences of American entrepreneurial spirit versus European risk evasiveness come right to the fore. But there is an old adage that is so right for this situation - “Fortune does favour the brave”.

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