In an exclusive interview with Moneycontrol, the PwC veteran cited technology, healthcare and industrials as his top sectoral picks for deal activity while adding that the funding winter is not yet over
Eric Janson, a PwC veteran of more than three decades, believes India is the most preferred destination in Asia for private equity bets
India's buoyant capital markets are high on the radar of global private equity majors betting on factors like valuation, reliability and stability that are unmatched currently when compared to the rest of the world. That's the word from Eric Janson, Global Private Equity, Real Assets and Sovereign Funds Leader at Big 4 firm PwC who spoke exclusively to Moneycontrol during his Mumbai visit.
Janson, a PwC veteran of more than three decades, believes India is the most preferred destination in Asia for private equity bets. His top sectoral picks for deal activity in India are technology, healthcare and industrials even as he added that the funding winter in the startup ecosystem is not yet over.
Moneycontrol also spoke to Bhavin Shah, Private Equity and Deals Leader, PwC India who weighed in on the role of private credit for financing needs of Indian corporates and the regulatory and policy climate.
Edited Excerpts:
2023 was a rather forgettable year for the private equity community and many would link that to the spiraling interest rates. Consequently, we saw a dip in exits and fund raising. What feedback are you getting from your global clients about 2024 and how optimistic you are about deal activity?
I generally like to consider myself as a relatively optimistic person. So it (deal activity) has been slow to come back and certainly the interest rate volatility has been a factor. I think on the positive side, though, what has been really good to see, is that in most geographies, folks feel reasonably confident that interest rates have peaked. So at least that gives the private equity or the investor a sense of comfort that they know what that maximum interest rate will be. Whether interest rates come down over the next three to six to 12 months, probably is still to be determined, but the fact that they have a sense of what that peak will be, gives them more optimism going into the rest of calendar 2024 and into 2025.
I see that as a positive and it should lead to some nice deal momentum going into the rest of this year. I think you have to also look at other factors like geopolitics also. It's hard not to also consider how much capital is on the sidelines that has to be deployed and how many portfolio companies these private equity funds hold. The last count I had was roughly 28,000 portfolio companies that are being held by private equity funds. That needs to be churned and that money needs to be returned to LPs (limited partners). So you've got a lot of tailwinds that are behind this market. And I think with stable interest rates, it should hopefully promote some deal activity here over the next few months.
You have struck an optimistic cord. And talking about dry powder, the likes of Blackstone have $200 billion of dry powder which has to be deployed globally. Over the past year, India has been seen as a global bright spot. Would you say India is today the go-to destination for global private equity players in Asia?
There is little doubt in my mind that it (India) is one of the hotspots globally, and in particular, in Asia. There are some nice characteristics in Southeast Asia as well, but given the sheer size of India with factors like 1.4 billion population and GDP growth north of six percent, there's not many countries in the world that are north of two percent. I also heard recently that your’s (growth rate) might be re-forecasted up to nearly seven percent. That type of growth isn't coming in many other countries of this size and with this sort of trajectory in terms of its middle class and intent on building infrastructure.
I think there's a really, really optimistic tone to be taken towards India and the number of our clients that have established significant footprints in this city (Mumbai) and in this country, is testament to the belief that there's a large opportunity in India. Many of our folks are planning to put extra allocations towards India. It’s been said publically that deal volumes could multiply five times between now and the end of this decade and you're just not seeing that type of growth elsewhere. So I do think you're going to see a disproportionate amount of equity starting to flow towards this area.
So, the most favored pick in Asia is India?
Yes, I do think so, just given the sheer size, right? You don't have this type of population, this sort of consumer demand and this sort of real estate market in any other place at this scale.
In the past few years, we have seen PE firms looking at unorthodox targets. Swedish firm EQT acquiring BPEA, Grant Thornton US selling a majority stake to New Mountain Capital and recently, we heard about CVC Capital keen on EY’s Italian consulting arm. Back home in India, KKR picked up a majority stake in investment bank Avendus. Going ahead, Do you see more PEs looking to take charge of rival PEs, parts of global accounting and consulting firms or i-banks? What is the driving force here and investment philosophy for such transactions?
Yes. Let me break my response into two categories. The first one you mentioned, funds buying other similar type funds or other asset classes. I think there's a strong desire, especially by some of the larger players to get more and more assets under management because that does allow them to provide a diversified offering to their clients and limited partners (LPs). It also gives them some efficiencies in terms of ways they can run their business across multiple sectors. So I do think you will continue to see private equity funds buying a credit fund because they want to be able to offer a credit product to their clients.
I think the LPs are actually looking for their big private capital clients to be able to provide a very diversified, well organized, and efficient investing option for them. So I think we will continue to see that on the side.
Regarding your point around professional services firms, super interesting, right? I've got a bit of a self-interest in that. It's great to see the attention on it because I do think that ends up making it a little bit more obvious as to what the value opportunity is.
And you can see the way some of these firms are set up. They're either geographically set up or they have certain functional expertise. It's a typical private equity plan that you can look at an opportunity to scale some of those businesses, whether it's by going and buying a bunch of geographies to create a global scaled company or certain functional capabilities. You might have a cyber and risk consulting firm that you want to marry up with a broader consulting firm. Being able to put those together is hard organically. But to be able to do that inorganically is pretty efficient. Private equity has shown a long track record of being able to build up companies like that from different pieces.
So I do think, that's going to be a pretty interesting one to see play out. They're very complicated, because most of those types of businesses are partnerships, in different geographies, with different capabilities. You have got culture issues, regulatory issues, and it's very reliant on the people. Those are people businesses. This isn't selling a product or a monthly service. This is the people you're investing in, and how do you keep all those people aligned and moving in the same direction. So, it’s a super interesting area for private equity to play.
Right. Let's see how the exit strategies play out in many of these situations. Now, let's shift focus to the startup ecosystem. Eric, is the so-called global funding winter in the startup and tech ecosystem still on? Are you seeing VC firms making a return and signing bigger cheques more frequently, as was the case earlier?
I don't think we're seeing that quite yet. I don't think anyone would disagree. There was a period of time a couple of years ago, where it did get a little bit too frothy. And I think people were chasing growth for growth's sake, and not necessarily understanding the fundamentals of the business they were investing in or even the financial performance of the business. So I do think there's this period of taking stock on what you do have, making sure that you can actually either get out of that investment and return the dollars or potentially write something off. And I think that has led them to take a bit of a pause.
There are so many opportunities in that growth sector, that it's just a matter of time before some of that comes back. But I do think a lot of those funds are really taking stock of what they do have before they actually go in and put a lot more money to work.
All right. So we're not completely out of the woods yet?
Yes. I have not seen that volume come back. And my sense is we still got a little bit of time before we see that come back to where it was.
What role do you think will be played by the sovereign funds and pension funds when it comes to competition with the bulge bracket buyout PE funds for Indian targets? Do you expect the former category to opt for the consortium route and focus on minority stakes or take the PE majors head on in controlling stake situations?
It's an interesting part of our market, one that I'm very, very bullish on, just because of the sheer amount of capital that they have to deploy. What's interesting for folks to recognize is that most of them, in fact, I think all of them, tend to be the limited partners in the private equity funds themselves. So there's this inherent partnership/conflict that they must manage. And it will be interesting to see how that plays out. Up till now, the vast majority of their effort and dollars is generally around actually linking in and co-investing alongside those LPs and transactions.
I think that's where you'll continue to see a large amount of dollars. But I do think they've all done some of the math on this. And direct investing is an area where they can actually also make some returns as well. So several of them are building an infrastructure to be able to do their own deal sourcing and execute on their deals.
They will also have to build their teams here …
Yes, build teams to do those deals. By mandate, some of them can't do majority deals. So I don't think you'll ever see them do majority deals. But some of them now are allowed to do majority deals as well. I see them playing a bigger and bigger role in this ecosystem that we're in. But I think they will have to manage that dynamic between investor and partner versus competitor because I think that will be something that comes up. As these bigger deals come to play, there's only a certain number of people that have the required equity cheque size. And the sovereigns and the Canadian pension funds are in the bracket of folks that can do those types of deals.
What are the top three sectors in India that will stand out in terms of maximum private equity deal activity this year?
There's no doubt technology continues to be an area that will have a lot of interest serving the population that you have here and their needs are going to require technology solutions. So I think that will continue to be a hot area. Secondly, health services in and around your infrastructure. I think we've seen a lot of deals in that space already. Industrial services or industrial-type businesses I think will be of interest. And then infrastructure. I think infrastructure is the one segment that I see coming up as well. And you also have the energy transition that links into infrastructure as well. So whether it's solar panel, wind farms, alternative energy sources, electric vehicles, when you think about the size of the population you have in this country, all those areas, are going to require significant investment dollars. And I think there's a return to be made there as well. So I think those will be some of the hotter sectors and subsectors over the next several years.
One trend that panned out last year and coincided with the buoyancy in the capital markets was the rise of big, block deals which were mostly led by private equity players, which had a chunky or a majority stake in these listed companies. So at one go, it was a cleanup trade... Is that something that has been happening globally as well? Or is this just a reflection of perhaps how deep the Indian capital markets have got?
Yes. I think it's more of an Indian phenomenon. But I do think you'll see more and more of these types of transactions happening outside of India, and I'll speak specifically of North America. There still tends to be an expectation gap in terms of what the seller or the PE fund might have an investment on their books on and what the market is going to return to them. And I think that's causing still a bit of a pause. Private equity does not want to sell a business below what it might be marked on their balance sheet or what they might think the right return is. So I think they're still a little bit more patient and waiting for that valuation to get to where they think it's appropriate before they actually sell. So there's a little bit more of a delay in some of the other markets.
Another fallout of the buoyancy in capital markets is the emergence of more IPO candidates. Many of these IPO candidates are backed or promoted by global private equity players. What's the dynamic globally when you look at private equity players looking at the exits? Are they looking at secondaries? Are they looking at classical M&A auction processes? Or is the trend now shifting to/opting for the public markets where they might get a better valuation? I have noticed in many situations in India, M&A situations have been paused and the same target becomes an IPO candidate later.
You guys are in some ways spoiled with the capital markets that you have in India. The IPO market in this particular country is for the most part unmatched right now in terms of what's going on in the rest of the world. So the IPO path here is one that is certainly high on the radar of most of our clients because of the valuations you get, because of the reliability and the stability that the market has been providing of late. We're not seeing nearly as much of that in North America and Europe. Those markets are starting to show some signs of recovery.
There was a period two years ago where any sell side that was happening was a dual track between potentially selling to a strategic or a private equity fund, or taking it public. That has really gone away in the last probably 18 to 24 months. But we're starting to see some signs of that IPO market in the US, in particular, starting to come back. So I think that will continue to be something they'll consider, but not nearly to the extent that we're seeing in your stock markets here, which have been a phenomenal opportunity for the retail investor and for the private equity funds relative to some of these exits. So, it's one of a kind.
How do you see the REITs (real estate investment trusts) and InVITs (infrastructure investment trusts) ecosystem evolving further in India and how has the performance been so far?
Very well. I think you're going to continue to see a lot of momentum in that market. You can just see it literally driving around this town, the amount of construction that's going on, the demand for commercial real estate, you know, high grade commercial real estate. I think we'll continue to see private capital flowing into those types of opportunities. And then converting those into REITs where you can provide the investor, a return of that. I think the appetite from the investors in India, both retail investors and other investors is very, very strong. So I think you have a nice match there, which will create a really nice outcome over the next several years in this market just because of the tailwinds that you have here.
Going ahead, among the top global private equity funds, which of them do you see most active in India?
I think it would be a politically correct answer on that one and I wouldn't want to disclose individual names. But what I found is very interesting is if you look at the top funds (the bigger ones in terms of how much they have in assets under management), most of them have been very, very strategic about evolving the different capital classes they invest in. And they've been very thoughtful in terms of regions that they want to go into where there's extraordinary growth potential.
Luckily for you, I think India has a little bit of all of that, which provides a really interesting opportunity for these investors. And for the most part, all have positioned themselves with a pretty strong foothold in this country to take advantage of that. So I'm not sure there's one that's going to lead out of that, but I think you're going to see those top 5 or 10 players play a very, very prominent role here over the next several years.
To what extent is private credit provided by private equity players in India eating into the market share of traditional syndicated loans when it comes to the financing needs of India Inc and how would you compare the both?
Bhavin Shah: Private Credit currently overall is in the range of $4-5 billion. This is still a fraction of traditional syndicated loans. Borrowers will access private credit only in cases where traditional bank /NBFC funding is unavailable. The private credit opportunity in India is currently focussed only on the real estate and infrastructure sector and in the stressed asset segment due to cost of funding.
Changes to the taxation regime related to capital gains has often created undesired uncertainty for investors, which needs to be addressed for longer term advantage for India.
ASHWIN MOHAN
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