Globally the Importance and Awareness towards Impact Oriented Investments are on the Increase: Ajit Kumar, Managing Partner, Evolvence India Fund
In an Interview with BW Businessworld, Ajit Kumar, Managing Partner, Evolvence India Fund talks about exit options in the PE industry and more
Do you think the PE industry has become overcrowded with diminished returns?
The question relates to whether there is excessive competition for the available investment opportunities which is driving up pricing pressure on one part and on the other whether any such pricing pressure is resulting in diminished returns.
On the available opportunities in India and the competition:
Private Equity activity in any country is generally related to the size, structure and regulatory framework of the economy. In addition, the stage of economic cycle and the buoyancy of overall economic activities will also determine size and number of opportunities. We are currently the fastest growing major economy in the world with about 2.8 trillion dollars in GDP, economic reforms in the country has made it one of the relatively more open economies.
We have one of the largest number of publicly listed companies (though many of them are actively not traded), we have about 63 million MSMES which if we can narrow it down to 50-100,000 investible companies. The start-up and VC eco system are also generating more investment opportunities for the PE investor.
The capacity to borrow from the banking system and the availability of credit in the country plus entrepreneurs/promoters receptivity to take PE investment also factors in the overall context.
While there are such large opportunity sets available, competition for potentially good investments are also high. Generally there are no barriers to entry for a PE Manager other than their ability to raise capital. In India there are currently about 325 PE managers active including global managers but excluding real estate. Out of these about 145 are domestic managers and in addition we have about 65 VC Fund Managers. As such there will be always competition for good quality deals. In addition, in India the intermediation by bankers are also very high. All these add to pricing pressure.
The returns generated over the last 5-6 years show that despite competition, PE managers are able to generate good returns in India. The underperformance and overhang of 2006-09 vintages are almost getting over. As per a recent McKinsey report, the average return on exited investments has gone up from 8% in 2006-08 to 22% in 2012-14 vintage.
One of the other ways to look at whether the PE space is overcrowded is to see the PE Investment penetration or the ratio of PE investments to GDP. In the US and UK this is about 2% of nominal GDP whereas in the emerging market it varies from 0.5% to 1%. We are at getting close to 1%.
What is the usual procedure of selecting a company for investment?
Once an investment opportunity is identified after various analysis and assessing the suitability of a particular investment to the firm’s investment strategy, extensive due diligence - financial, legal and operational are carried out. In addition there are few key criteria a PE manager will look for. These are (a) the attractiveness of the opportunity in terms of risk reward (b) valuation (c) the exit options (c) the promoter/entrepreneur – his/her integrity and credibility. In addition, whether his/her vision is aligned to the PE investor in the context of the value creation process.
What are the real exit options in India? Which ones are the most used?
A PE Manager has to consider alternate options of exit as they have a limited holding period. Now in India we have almost all the exit options available. During the 2005-08 vintages, when we were early into the PE activities in India, Managers were more focussed on IPO as an exit route. The problem with IPO route is that there are some favourable periods of IPO activities and then there are not so favourable periods and if you miss the window, the expected IPO and the exit gets delayed and the next such favourable window will be few years away.
While IPOs will continue to remain as a significant portion of the PE exits, especially for large and late stage growth capital deals, Strategic Sales and Secondary/Trade Sales (sales to other PE funds) are on the increase. For lower mid-market deals strategic sales and secondary sales will constitute about 40-50% of the exits today.
How can we attract more PE investments into India?
PE investment is patient capital unlike portfolio investments into public market investments. PE investments have multiplier effects on the economy. Countries like India should promote more and more PE investments into all sectors of the economy by stream lining the tax structure and by providing an enabling regulatory frame work.
A US focused research in 2017 reports that about 5% of the US GDP growth is coming from PE backed investments activities. This is significant. Private Equity backed companies tend to perform better than its peers and increase competitive standards across the industry. It leads to productivity gains and in turn the competitiveness of the economy. A 2016 research “PE in the Global Economy: Evidence on industry spill overs” by Institute of Private Capital reported that “a one Standard Deviation increase in the amount of PE Investments in an industry leads to a 0.9% increase in employment growth, a 1.2% increase in labour productivity growth and a 2.6% increase in profit growth”. These positive outcomes in productivity gains and resultant increase in per capita GDP are shared by all stake the holders – investors, employees and the society in general.
Considering the benefit of PE investments the government should formulate appropriate policies so that more and more PE investments flow to India. Also, I think within the federal structure, a healthy competition among individual states to attract more PE and FDI into high capex infra and manufacturing should be encouraged. So that helps to meet the Regional Aspirations and achieve the National Ambition as PM Modi has mentioned.
What is your view on Impact Investing and the focus on ESG benefits to the economy and society?
Globally the importance and awareness towards Impact oriented investments are on the increase. Various studies and researches show that there is strong correlation between sustainable and purpose driven investments and positive investment returns. The recognition that while a change or a positive social impact can be achieved together with a financial return is changing the investor focus to allocate more and more capital to social value investing. Many of the global big PE managers are rolling out impact oriented investment strategies and raising billions of dollars. The ESG (Environment, Social and Governance) compliant investments which are more focussed on financial inclusion, health care, education, agriculture and environment are improving livelihood for millions of people and help the society at large. The Global Impact Investing Network (GIIN) estimates (20018) that the current size of Impact Investments are to the tune of about $502 bn and about 1340 organizations/investors are part of it. In India it is about 1% of this currently but this is expected go up as more and more impact funds are being raised and their allocation and investments in India increases.
Globally the importance and awareness towards Impact oriented investments are on the rise. Various studies and researches show that there is strong correlation between sustainable and purpose driven investments and positive investment returns. The recognition that while a change or a positive social impact can be achieved together with a financial return is changing the investor focus to allocate more and more capital to social value investing.
Many of the global big PE managers are rolling out impact oriented investment strategies and raising billions of dollars. The ESG (Environment, Social and Governance) complaint investments which are more focussed on financial inclusion, health care, education, agriculture and environment are improving livelihood for millions of people and help the society at large. The Global Impact Investing Network (GIIN) estimates (20018) that the current size of Impact Investments are to the tune of about $502 bn and about 1340 organizations/investors are part of it.
According to a McKinsey Report, between 2010-2016 $5.2bn has been invested in impact investments in India. By 2025 the annual impact investment in India is expected to be between $6-8 bn.
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