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December 10, 2008

The Private Equity View

Outlook Business has a set of invited articles by leading investors as part of its cover story on Private Equity. Some extracts:

Akhil Gupta of Blackstone
Also, since liquidity has dried up globally, the price of money will go up—and so will the price of private equity. Today, there is less money available with limited partners (institutions that invest in private equity firms), hedge funds, mutual funds, individuals and private equity. When anything is in short supply, its price goes up. This means we (private equity) will be looking for higher returns. Our bar for investing will be higher and we will show a lower appetite for risk. Therefore, we will do deals at lower valuations than we did in the past and we will be more selective.

Ashish Dhawan of ChrysCapital
The environment will be much better for control deals. In the next couple of years, the definition of core competency will become more genuine. In a growth economy, core competency can just be ‘I’m a good entrepreneur’. Now, as capital becomes scarce, people will realise that, in some industries, if one is going to be a marginal player, one is better off getting out. This situation will lead to buyouts. The challenge in India for buyouts is not that there are constraints to raise debt for acquisition financing. That is a secondary hurdle. The biggest impediment is that people still don’t want to sell. Therefore, in a way, one needs a slowdown or crisis to precipitate greater probability for people to at least consider selling out. If the equity markets are tough for the next 18 months, which is possible, people will capitulate.

Nitin Deshmukh of Kotak PE

The big worry in the medium-term is on the exit front. If exits get impacted, returns too get affected. All the efforts put in to build a good portfolio will go in vain. While we are happy with the kind of portfolio that we have built, if the capital market continues to be depressed for the next 18 months, we will be tested. We had budgeted for only one company going public this calendar year, and it has filed its draft red herring prospectus. But its IPO may get postponed. Next year, three companies in our portfolio will be ready for IPOs.

Luis Miranda of IDFC PE
From an investment point of view, the biggest problem has been valuations. In the summer of 2007, before the markets went crazy in December, valuations had gone ahead, and everyone was focusing on what someone had then termed the ‘PV ratio’ or the price-to-vision ratio. People ignored critical factors such as execution risks. In infrastructure, for instance, there are so many legal and execution risks. Last year, both investors and entrepreneurs forgot to factor in those risks in their due diligence. We passed over a lot of deals because valuation expectations were too high. In some cases, expectations are still high, but overall, we are beginning to see more realistic levels.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in