Commenting that the spike in the venture capital activity is good for the industry since it means that, over the years, a lot more well-funded and well-organized companies will come into the market, Alok Gupta, Managing Director, Headland Capital, said the lack of exits however has been a major challenge. “Most funds would look forward to exits rather than to large investments this year,” he said. Gupta predicted that secondary deals – in which the existing PE investor sells its stake to another PE investor - is likely to remain as a strong trend  over the next 12-18 months. He also noted how the gap in mezzanine funding in the market is becoming increasingly felt. 

Veteran angel and VC investor Kanwal Rekhi, Managing Director, Inventus Capital, agreed with Gupta on the issue of exits, adding that, compared to China, India presented a more difficult scene for exits. For example, there was no IPO listing in Nasdaq by Indian companies during 2011 and there was only one in the previous year, compared to over 40 from China.

“As a i-banker , I am more optimistic about 2012,” said Gautam Benjamin, Senior Vice President, Edelweiss Financial. He pointed out that despite starting on a gloomy note, 2011 ended up as the second best in the last seven years in terms of PE investments.  He expected promoters to look at the PE funding route in 2012 as the capital markets will be highly picky this year.

Talking about the developments in the regulatory domain, Sandip Bhagat, Partner, S&R Associates said that PE investors should watch out for compliance with Competition Act and also the new Companies Bill. For example, as per the new Companies Bill, insider trading norms are sought to be applied to all companies and not just listed firms. Consequently, that would have impact on how capital is raised and how information is shared with investors, Bhagat said.
 

Anil Singhvi, Chairman, Ican Investment Advisors began with a note of caution saying that, notwithstanding the stock market rally in the first few weeks of the year, 2012 might actually be worse than 2011. He reminded the audience that the government had corrected its growth forecasts gradually through the year, from 9% in the 2011 Union Budget to 7% now.

Recalling his experience with fund raising through the PE route as early as in 1999 (as part of Ambuja Cements), Singhvi said that PE investments in India has remained a “money providing game” even though such investors can play a much larger role in terms of being active board members. He regretted that investment decisions are largely based on spreadsheets and argued that PE investors should get to know businesses in which they are investing better and be more willing to take risks.

Naina Krishna Murthy, Managing Partner, K-Law set the ball rolling by stating that in India, in 2011, less than 5% of PE deals were buyouts compared to 40% globally. Reflecting on why the number of buyouts is so few in India, she cited factors such as lack of professional management teams required to operate companies post buyouts, unwillingness on the part of promoters to give up stake for valuation- and sentiment-related reasons and a regulatory framework that is not conducive for doing leveraged buyouts.

Vikram Narula, Partner, India Value Fund said that, compared to 10 years ago, there is much better recognition today among corporate houses of Private Equity as an option when they seek to exit businesses. He observed that a large number of entrepreneurs are able take their businesses up to a certain level, but after that, often struggle for capital and other business enablers (especially management talent) to scale further. By entering into a control transaction with a PE investor, they won’t have to worry about the capital issue and will also be able to bring on board experts (available either in-house at the fund or via consultants) who are highly experienced in terms of building scale. Also, since such transactions often involve a secondary element (wherein the investor purchases a portion of the promoters’ shares), the promoters also get to partially de-risk themselves financially.

Sandeep Reddy, Managing Director, Peepul Capital said since legal implementation of contracts in India is time consuming, his firm has preferred to opt for controlling stakes in most of its transactions. Such deals enable the firm to “control its own destiny” which is especially important given the firm’s obligations to its investors. Control transactions take longer to complete especially since it involves creation of deep trust between the investor and the entrepreneurial team. As more and more promoters and entrepreneur-managers understand the power of this capital, the scope for control transactions would increase, he predicted.

Robert Brown, Managing Director, Lincoln International, outlined the key reasons for the popularity of buyouts in mature markets such as the US.  The owners or promoters of companies that go in for such transactions, realize that though they may not retain board control or governance control post the buyout, they would typically get higher valuations and also enjoy operational control over the business. Plus, as long as they select the right PE partner who can add value to the business, they could expect to gain substantial upside on their balance equity as the business scales going forward.

Sudip Bandyopadhyay, MD & CEO, Destimoney Securities (a company that is majority owned by PE firm New Silk Route), said that, in India, there is a clear distinction between promoters and professional managers when it comes to buyout/control transactions. A typical Indian promoter does not want to give up control and become a manager in a company that he/she once majority-owned. On the other hand, there is a growing breed of professional managers who have good track records in managing large businesses at the established business groups. Going forward, such professional managers will be willing to take entrepreneurial risk as teams and will attract more private equity capital, he predicted. He pointed out that having sector experts equips a fund to better advise the company’s management and keep a watch on its performance, but cautioned that such experts should not be tempted to run the investee companies.

Rajiv Kaul, CEO, CMS InfoSystems (a company that is majority owned by PE firm Blackstone), said promoters tend to have very clear short term goals and long term goals (“we want make x amount of money”, “we want to create a lasting brand”, “we want to have our brand on buildings,” etc.), while PE firms have very good medium term plans (since they would have zeroed in on a sector after mapping out how they can scale such a business over the next 5-6 years, etc.) and if the both can be married, it makes for a powerful combination. Kaul said that a large number of buyout deals were waiting to happen in the mid-market in India, but there are not too many funds concentrating on such transactions. Among the challenges in doing such transactions however would be attracting quality management teams who would be willing to run smaller companies.

Moderator for the panel, Siddharth Raja, Partner, Narasappa, Doraswamy & Raja set the ball rolling by remarking that education, besides healthcare, is a sector that doesn’t really face a recession or downturn. He also observed that the sector is of great social relevance and impacts millions of citizens.

Recalling his experience of having made five direct and many more indirect investments in the sector over the last seven years, Gopal Jain, Managing Partner, Gaja Capital  said his firm would have done perhaps twice the number of investments but for the regulatory constraints. Education seems to be the only sector where the government is very reluctant to partner with the private sector even though reforms here is probably the most immediate concern for India. He also opined that the moment a market-related paradigm is replaced with a not-for-profit paradigm, it increases the entry barrier for meritocracy.

KK Iyer, Managing Director, India Equity Partners observed that contrary to popular perception, some parts of the education sector are closely linked to business cycles and have suffered during the downturn. Also, some players have found scaling up has been a real challenge despite robust demand. Measures such as putting in a policy framework for higher education, like what China has done, would attract capital to the sector, he felt.

Recounting his entrepreneurial journey since 2007, Amit Bansal, CEO, PurpleLeap, said while both the number of engineering colleges as well as the capacity have more than doubled over the last five years, most engineers could not be placed directly in jobs. He pointed out that unlike in schooling, in higher education (especially in the technology and business streams), bulk of the colleges have been set up by the private sector, but quality remains an issue. Given the rigidity of the framework, he and his colleagues decided to co-exist with the system and focus on the source where "damage" was being done – colleges - and yet make a difference in terms of scale and impact

Y V Rajasekhar Babu, Managing Director, People Combine, which runs Oakridge brand schools in Andhra Pradesh, detailed the motivation factors which enabled him to create the second largest International Baccalaureate (IB) school in Asia Pacific. He said People Combines aims to offer the world’s best school education at the cheapest price points, with the highest customer satisfaction and, at the same time, achieve the highest profits. He was also optimistic that regulatory challenges are not such a big hurdle as they are made out to be and could be overcome by private players.

Kosturi Ghosh, Partner, Trilegal set the tone for the discussion on Healthcare & Life Sciences by stating that it was heartening to note that the sector is topping the funding charts since investments in this sector leads to value accretion for India in infrastructure, innovation and skill. She observing that private equity has moved away from focusing solely on  established segments like hospitals to investing increasingly in diagnostic chains and specialty clinics.

Raju Venkatraman, CEO, Medall Diagnostics, compared the nascent state of healthcare services to the state of IT in the mid-eighties and early nineties. Despite the lack of skilled labour force and lack of processes, the opportunity in terms of dire needs is only growing and is enormous, he said. Citing how the largest diagnostic company is only about $75 million in size and the sector accounts for a business volume of about $3 billion, he pointed to the level of fragmentation in the sector.

V T Bharadwaj, Managing Director, Sequoia Capital India agreed that healthcare related spending formed only a small part of the GDP in India and the size at which investments were being made is very small compared to the potential. He said that, when it comes to investing, a company being small is not an issue by itself and, in fact, innovative business models have emerged to provide sophisticated care at affordable prices, requiring lower investment thresholds. Before making an investment, he would look at the unit economics and would like to make sure that it works. Secondly, he would look at capital intensity.

GSK Velu, Managing Director, Trivitron explained how the relatively quicker profitability model of diagnostic chains, compared to hospitals, attracts investors. He lamented the lack of development of medical technology sector in India, in contrast to the development in China and suggested that PE players should look at that segment seriously.

Setting the agenda for the discussion, Sudhir Syal, Editor & Co-Anchor - Starting Up, ET NOW, wondered if the recent shake-up in the e-commerce sector was a result of investors getting their timing wrong. He also posed the question whether the customer acquisition cost was way too high for e-commerce sites.

Responding to a question on whether entrepreneurs got carried away by the funding momentum, Sunil Goyal, CEO, YourNest Angel Fund said some entrepreneurs did fall into that trap because of the low entry barriers and non-regulated nature of the Internet and Mobile sectors. Going  forward however, only innovative ideas and fundamentally sound business models would  attract  investors.

Alok Kejriwal, CEO and Co-Founder, Games2win described two approaches to building businesses - the "balance sheet way" in which one spends first and earns much later and the "P&L way" in which one earns revenue first and builds assets later. He too emphasized the need for Internet businesses to market themselves by standing out from the crowd. “On the Internet, you don’t advertise, you get discovered," said Kejriwal. When it comes to valuation negotiations, since  VCs anyway tend to a insist on a minimum stake in the company, he advised entrepreneurs not to  worry about the percentage stake they end up diluting and instead ask for more capital for the business. 

Gaurav Shah, Group MD & CEO, DeGroup talked about the mobile applications space and said that there was no balance between the number of apps and the utility value of apps. While the apps stores have been talking big money, apps builders don’t get much money at all, he observed.

Sandeep Reddy, Co-founder, Groffr  outlined the various challenges faced by entrepreneurs in this sector including. With angel/seed funding, hiring becomes easier once the brand building happens. But when the organization scales up, hiring again becomes a challenge since you now have to do it in higher volumes. Increase in funding availability for Internet companies has helped increase the confidence among entrepreneurs that, if they have a good idea, they can get the capital required to scale the business, he added.