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Interview with Vishal Tulsyan, CEO of Motilal Oswal Private Equity

Vishal Tulsyan, CEO of Motilal Oswal Private Equity, which has invested 50% of its $125 million first fund across eight companies including dairy firm Parag Milk, “reverse logistics” firm RT Outsourcing and Rajasthan-based NBFC AU Financiers, recently spoke to N. Sriram of Venture Intelligence. Some excerpts:

Venture Intelligence: What is your outlook for the PE market in India over the next 2-3 years?

Vishal Tulsyan: Deal flow will slowdown. In the last two years, many companies raised money, not because they required money but they wanted to set a benchmark valuation and eventually go public. Going forward, you would see a fewer number of such deals happening. Companies with genuine need for outside capital, who have the right mix of capital structure in place, will be the ones out there to raise money.

We will see fewer pre-IPO deals because we will not see a strong capital market. Exits will definitely become difficult. Investments that happened in the last 2-3 years expecting an exit at the end of 2008 or 2009 will have to wait for some more time.

We would probably see more controlled deals happening in the coming 1-3 years.

VI: Will India-dedicated funds find it difficult to raise money?

VT: My view is that the global liquidity crisis that we are witnessing right now would be beneficial for India but that process will be slower, because the capital pool that was available globally has shrunk. So, people are going to be selective about the funds that they are going to put their money in. The due diligence process for people to commit to any fund is also going to be stricter now. The next 3 years would be a time to separate men from the boys.

VI: Given the current market conditions, would you look at changing your preferences with respect to the stage of the companies you invest in?

VT: We essentially look at providing growth capital. Going forward, we will continue to do that. We would invest in companies which are 5-7 years old and with a sustainable track record.

In the last 3-4 years, the deals that have happened in India have been more of the pre-IPO kind. Now, investors would start looking at providing growth capital and would also look at liquidity events (which need not necessarily be an exit) 3-5 years from the date of investment.

VI: How about your sector preferences?

VT: During the last 6-9 months the overall profile of the economy has changed. The sectors that were looking hot 12 months ago are not so now. People have started to look at businesses that are not cyclical in nature, sectors which are not truly dependent on the performance of the economy over the next two years.

A sector that was left out in the past two years is the pharma sector. I expect pharma to witness more PE action in the coming quarters.

VI: Which other sectors do you see doing well?

VT: FMCG, consumer services and infrastructure for sure. The government’s 12th plan had allocated about half a trillion dollars for infra; even if only $300-350 billion is spent, that itself is a huge amount. You will see a lot of money going into the infrastructure sector.

VI: Would you avoid any sectors?

VT: We would avoid cyclical ones. We would be very careful about auto ancillaries and the auto sector. Because we see huge contraction in demand particularly in USA and Europe, wWe are also less optimistic about companies whose fortunes depend heavily on exports. Demand contraction may be seen in India as well but it would not be as much as what is seen elsewhere.

VI: What would be your average deal sizes?

VT: The deals would be in the range of $5-15 million. A perfect investment would be where, once we have made our investment, the company is completely self-sufficient in the next 3-5 years as far as cash flows are concerned. A company should generate cash flows which not only meet its working capital requirement but also its incremental capital expenditure requirement. Even after that, it should be left with enough cash to pay dividends to investors.

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