PE deals lack 2005's zeal, infra still down: Renuka Ramnath

Below is the verbatim transcript of the interview:

Sonia: 2014 was a very good year for private equity investors if you look at both fresh investments as well as exits. Do you foresee the same for 2015 as well?

A: It is difficult to say because in 2014 even if you look at what transactions happened, which is largely concentrated on one sector which is IT and information technology enabled service (ITeS), a lot of e-commerce transactions, business process outsourcing (BPO) transactions. The rest of the sectors particularly infrastructure was next to nothing. I would say that there is a long-term positive outlook for India when we talk to investors all the time and there is interest in knowing the India story, evaluating the India opportunity which was not there a couple of years back but I would not say that they are already to open the purse with the same level of enthusiasm that I saw in 2005.

Reema: 2014 was dedicated to largely to e-commerce. In 2015 do you see it at least to some extent getting extended to the other sectors and if yes, which ones?

A: I expect that 2015 large part of PE transactions will be PE to PE, so it would be much more diversified because it is a question of what assets have matured in the private equity portfolio which will now come up for sale. If I look at our own deal pipeline, it is much diversified; it goes everywhere from specialty, chemicals, manufacturing, healthcare, financial services and so on.

Sonia: You did mention that infrastructure sector is yet to see a revival and everyone is waiting to see some sign of that. What do you foresee for that sector, do you see any opportunities in 2015?

A: I personally do not see any of the opportunity. One of the big challenges for infrastructure sector is going to be how you recalibrate the balance sheet. All these companies need large balance sheets to bid for projects but their current balance sheets have lot of challenges, so how do you reengineer your balance sheet to attract fresh capital, is going to be a challenge for infrastructure.

Reema: Your fund recently exited South Indian Bank. What was the rational for it? Was that matured or are you a bit cautious or do you think that the valuations have hit reasonably level and therefore the exit?

A: It’s a combination of everything. As private equity investor, our job is to enter and exit, our investors would like to see some cash back as well. At the price at which it was trading given that we had entered at a very attractive price, it gave us reasonable returns, so it was a great opportunity for Multiples to return some capital to the investors and we could also get interest from domestic investor which also helps the bank. We are very conscious of the fact that when we exit our companies, we have to leave our portfolio companies in a better place than where we started. So I thought it was a win-win for both Multiples and the bank.

Sonia: Having said that will you be raising fresh funds at Multiples and what could be the investment strategy that you have in 2015?

A: We are in the process of raising our fund. We have done our first close for the second fund. We have come up with an interesting structure for the second fund. We have a main fund of USD 500 million with a co-invest fund of USD 150 million. We would be raising about USD 650 million which gives us a flexibility to invest in transactions anywhere from USD 25 million – USD 30 million up to USD 100 million by ourselves and along with our investors we can do much larger transactions.

I have always argued that for India the best investment strategy is an opportunistic investment strategy. I expect that in the next two-three years there will be many opportunities to invest arising out of corporate restructuring. There are lots of demergers that are already happening in the country and they present very interesting opportunities and there are situations where company sponsors, i.e. promoters are highly leveraged and they would like to use corporate restructuring formula to bring down their own leverage and that will present attractive opportunities for PEs. I also see that significant percentage of assets which are technically non-performing have a lot of hidden value and I expect that some of those assets will present themselves as attractive PE opportunity. My strategy for our second fund is going to continue to be an opportunistic investment strategy, more focused on reengineering of balance sheet, reengineering of companies and of course there are always those favourite consumer sectors around retail, around healthcare, around financial services which will continue to dominate our preference for the second fund.

Reema: Are a lot of your portfolio companies looking to tap the primary market and do an IPO. Are we expected to see a lot of IPOs happening this year because last year it didn’t take place to that extent?

A: I would also not put a lot of optimism on taping capital market this year. I would still think that access to private capital will be a preferred option for most companies.

Sonia: Two part question – you said that you do not see too many opportunities in the infrastructure sector, so which are the three sectors that you see opportunities in and you have also made a lot of investments in listed companies. Do you see investment opportunities increase in listed companies after the run up that we saw in the equity markets?

A: As far as listed companies are concerned. I have been in the market as an investor for close to 15 years, every cycle gives you a new set of opportunity and you have to be attentive enough and you have to look at which are the new segments that are giving you an opportunity. If you look at our investment even in a company like PVR; PVR is not a new story, we invested in 2003 and again we invested in late 2012. It has given us very handsome return even from our second investment which happened nine years later. So, there are opportunities in the listed space which will give the returns arising out of a new story. The new story could be a disruption. In PVR’s case it is a consolidation wave that is going on in the multiplex industry.

Sonia: You have an investment in Cholamandalam Investment and Finance Company?

A: Cholamandalam Investment and Finance Company is a fantastic story of how the new management completely turned around the company and brought them back inline with their core business and brought in a lot of discipline around lending and collections which has resulted in a phenomenal return for us. So, I would say that listed companies will always present attractive opportunities for PE and it is our job to locate those high alpha investments.

Sonia: What would be the key themes to watch in 2015?

A: The key themes would be lot of corporate action. I expect deleveraging of balance sheets, demergers, consolidations. The high growth story will be fewer, it would exist but it would be lot fewer than what we have seen in the previous high which was 2005-2006 phase.