Large deals back with a bang

There's been a spurt in private equity activity in recent months and large deals are back. Last month, Kohlberg Kravis & Roberts bought 20 per cent in Dalmia Cement for Rs 750 crore (Rs 7.5 billion), while a consortium of KKR, Standard Chartered Private Equity and New Silk Route invested Rs 1,000 crore (Rs 10 billion) in Coffee Day Resorts.

Last week, IDFC Private Equity invested Rs 465 crore (Rs 4.65 billion) in GMR Energy, an arm of GMR Infrastructure, while Carlyle invested Rs 102 crore (Rs 1.02 billion) in Tirumala Milk Products, the second-largest private dairy in South India. More deals are in the pipeline and many like Max India, Apollo, Fortis and Godrej Consumer are in the process of raising PE money.

Of greater interest is the return of big deals (see table).

In the biggest deal this year, a group of investors that included General Atlantic, Morgan Stanley Infrastructure Partners, Norwest Ventures, Goldman Sachs Investment Management and Everstone Capital invested $425 million in Asian Genco, a Singapore-based holding firm that is setting up 4,000 Mw power-generating capacity in India.

This was the biggest PE transaction since 2008, when Providence Equity Partners invested $428 million in Aditya Birla Telecom.

In its maiden investment in India in March, Quadrangle Capital Partners invested $300 million in Tower Vision India, a Gurgaon-based independent tower management firm. Shriram Capital raised $217 million from TPG Capital, while GMR Energy raised $200 million from Temasek.

Growth confidence

What's driving PE deals after a lull of two-and-half years? Bala Deshpande, senior MD for New Enterprise Associates (India), the Indian arm of a US-based venture capital fund, feels large companies raising money to invest at home is a confidence booster.

"Typically, large corporates are the last to raise equity money. They don't do so unless they are confident of future growth. Large companies raising money to invest in home markets is a notch up on the confidence index," said Deshpande.

This confidence is reflected in a revival in the capex cycle, while a spurt in PE activity is getting reflected in a significant increase in deal volumes.

According to Venture Intelligence, investments by PE firms tripled to over $3.7 billion (113 deals) during January-May  compared to $1.1 billion (91 deals) during the same period last year, while they invested $4.1 billion in 2009 across 274 deals.

"There's a return of (risk) appetite not just among PEs, but their investors as well," said Arun Natarajan, founder, Venture Intelligence. This explains the return of big deals.

But, Europe could spoil the party. Some of these deals may have been in the works for some time, said Pranav Parikh, MD, Q-India Investment Advisors, as it takes four to six months to close a transaction, but we have seen more large deals than in a long time.

Many of these deals have been in infrastructure – Dalmia Cement (construction-KKR), GMR Energy (power-IDFC, Temasek), TRIL Roads, a Tata Realty company (roads-Actis), Gayatri Projects (power-Sembcorp), Azure Power (renewable energy-IFC). In a few cases, such as Sembacorp's investment in Gayatri Projects' 1,300-Mw Krishnapatnam power project, PEs are investing at project level than in the company.

Push factors

PE players say the spurt in activity can also be explained by the robustness of the economy and the promoters' ability to deploy risk capital.

"The economy is again growing at eight per cent. This is significant;  optimism has come back.

"The government is focused on disinvestment, it will fetch three times the estimated revenues from auction of 3G spectrum. All these will help it reduce the fiscal deficit, when many countries are struggling to cut deficits," said the CEO of a PE major.

Another factor may have aided the spurt in deals. Many funds had not invested for a long time (two and a half years) for some reason or the other.

The environment was not conducive but, on Thursday, there's a lot of pressure on them to deploy the money.

Take an India fund which raised $500 million in 2007. It now has a life of seven to 10 years and an investment period of four to five years, which means it will have to invest by 2011 or 2012.

"If the committed capital is not invested, it is no longer your committed capital. Though valuations have gone up, there's pressure on PEs to invest," said an expert.

Industry insiders say limited partners (original investors) are increasingly cracking the whip on the funds. They had raised money from investors promising certain returns but, in many cases, have not been able to deploy the money for some reason or the other.

"The investors are saying either deploy the money or let my commitments off," said another CEO of a PE fund, who didn't wish to be named.

Typically, limited partners don't offer all cash upfront, but give a commitment to invest, say $50 million in a $500-million fund, that gets drawn down in phases over four to five years.

For instance, Ashish Dhawan-founded Chrys Capital said last week it had cut the size of its $1.25-billion Chrys Capital Fund V by returning $300 million of the capital to the fund's limited partners; in return, it got the flexibility to invest in public markets a lot more and exploit the volatility. Analysts say the pressure to invest partly explains why funds like KKR and Bain Capital have become so hyperactive these days.

Another fund manager, however, said it's unlikely that limited partners were cracking the whip.

"The only commitment is the two per cent fee on the drawn down amount. They get impatient if there's a change in investment strategy (instead of mid-caps, if you go and buy large-caps, they will get outraged). Or, if there's significant change in the team, LPs could ask for money back," he explained.

Fund managers expect PEs to invest $8-10 billion in India this year but a spillover of the euro crisis could spoil the party.

"Àlready, you can see that confidence is starting to waver," said Pranav of Q-India. PE players invested $17 billion in India in 2007 and $10 billion in 2008, which fell sharply to $4.1 billion in 2009. They have invested $3.7 billion this year. It will be interesting to see if the current momentum can be sustained.

Earlier issues

The slowdown in the past couple of years is understandable. Nainesh Jaisingh, MD, Standard Chartered Private Equity Advisory Ltd, said the past couple of years had been a watershed in Indian PE.

A number of funds were aggressive in deploying money in 2007, and have had to deal with the fallout of the financial crisis, and the resultant portfolio management issues.

"This has kept them preoccupied, leading to less focus on new deals," said Jaisingh.

For the funds which had not suffered this damage, and for some new entrants into India, the challenge in 2008-09 was that companies and promoters were not willing to issue equity at such low valuations.

And, did not have visibility in their own businesses. "With things having changed on both these fronts in 2010, deals are getting done. I expect the 25 per cent public holding requirement to create more opportunities for PE, as mid-sized companies would like to grow to size before they dilute large stakes," said Stanchart PE's Jaisingh.