Viewpoint: Smart money on changing face of corporates

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A significant amount of private equity money has been raised on the India story during the past two years.

Global private equity firms have invested $3.8bn in India over the first eight months of the year – 50 per cent more than during the same period in 2006, according to data compiled by Dealogic.

Indian companies have increasingly assumed an important role on the global private equity stage, both as big consumers of the ever-increasing available private equity kitty for India, and as one of the most willing trade buyers of private equity assets managed by funds outside India.

At first glance, India might not seem the safest investment bet globally, with its infrastructure challenges and widespread poverty. Yet those outward indicators obscure solid underpinnings for economic growth, including a democratic government, a strong educational system, broad knowledge of English and a deep pool of managers with overseas experience in western business.

Some PE investors see India’s “soft” attributes, including a free press, outweighing China’s more impressive investments in “hard” infrastructure, such as ports, plants, and transport.

Another interesting manner in which private equity has helped change the face of Indian companies, especially those in the mid-market or promoter-managed segment (which in India refers to companies that have controlling shareholders), is enforcing discipline – financial and otherwise – and ensuring compliance. A mid-market or promoter- managed company having a private equity investor commands a premium in the stock market, at listing and afterwards.

Private equity has created a positive perception of corporate governance and accountability in the minds of the investors in India and to some extent, in the minds of regulators, resulting in more lucrative valuations at the time of exit for private equity.

On the other hand, companies in India have started to see through the plain vanilla available cash that private equity brings to the table and started to ask, “What is the value proposition?”

Private equity has enabled many Indian companies to attract quality talent and managerial resources that hitherto were wary of the work environment and management style of promoter-managed and mid-market companies. The fact that a private equity fund has invested in a particular company seems to positively impact its reputation in the job market too.

After scouting for deals over two years, buy-out funds are finally making headway in the Indian market. Blackstone’s acquisition of Gokaldas Exports comes a few months after it bought Intelenet.

With the size of PE funds getting bigger and promoters becoming more responsive to the idea of cashing out, a whole new avenue for exits has opened up for promoters or entrepreneurs who until now relied on competitors, whether local or foreign, to buy their businesses.

As absolute ticket size has increased, IT, telecommunications, property, pharmaceuticals, financial services and autos have been favoured sectors.

India was once simply the recipient of private equity funds, especially from multilateral organisations. Now the country’s enterprises have fast become the buyers of global private equity assets. No Asian market has embraced private equity in such an encompassing fashion as India.

The changing face of the Indian corporate is seemingly recognised by the smart money of PE investors, who are playing their part in the metamorphosis of the SME sector in India.

The author is chief executive for KPMG in India

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