Anita M. George, Executive Vice President of CDPQ India, spoke to Preqin about CDPQ's investment plans for the year ahead and of the rising levels of activity in the region for the Preqin Markets in Focus: Private Equity & Venture Capital in India report.
CDPQ has been one of the early pioneer investors in India’s institutional private equity market. How have your private equity investments in India performed over the past five years?
CDPQ is a recent direct investor in the private equity market in India. Since setting up office in India in 2016, CDPQ has committed around $5.5bn to India and of this, deployed around $3.8bn across asset classes. Our private equity investments include both direct and through funds such as in TVS Logistics, Edelweiss Stressed Assets Venture, Edelweiss Special Opportunities Fund, Kedaara Capital, Fundamentum and Chrys Capital. CDPQ is a long-term investor with patient capital and no time-bound pressure on exits. We are still building our portfolio in India and hence cannot yet comment on performance.
What are some challenges you faced and how did you overcome them?
We have learnt that business cycles and crises will happen and there will be periodic bouts of volatility. What we have learnt as an industry is that we need to ask more questions, be more diligent and look at fundamental risks more carefully. The way we insure ourselves is by considering three components while investing: the right partner, the right diligence and potential disruptions, which can come in the form of technology or other kinds of competition. Additionally, we invest in large ticket sizes and the universe of available opportunity is fairly limited in India, resulting in high competition for these opportunities; however, companies have opted to partner with CDPQ because they see the value of having a long-term partner whose interests are closely aligned with theirs.
Do you foresee these challenges evolving in the future?
Indian private equity is on the upswing. From a macro perspective, the total dry powder in India is estimated at c.$9bn, which indicates no dearth of capital for good-quality deals.
The volume of private equity activity – fundraising, investments and exits – has grown in the past three years and is expected to grow further, helped by global liquidity and the demand created by the inability of other domestic sources of capital to keep pace with a growing economy.
The industry has seen a greater range of participants and a wider spectrum of deal types and investment strategies. Deals greater than $100mn have grown in the past three years.
Firms are learning from experience and shifting into buyouts and control deals, where they have more influence over their investments.
What opportunities do you think global institutional investors should be considering when evaluating an investment in India’s private equity space?
India is one of the fastest-growing economies in the world. Its young labour force is growing at a rapid pace, driving strong demographic trends. There is significant ongoing progress regarding governance and structural reforms increasing India’s competitiveness and attractiveness to international financiers. Recently introduced structural reforms, including the passage of the Goods & Services Tax (GST) Bill and the Bankruptcy Code, have been game-changers. This has made India an attractive investment destination and is the reason why permanent capital in the form of FDI (foreign direct investment) is moving in from all parts of the world.
A new generation of business owners and professional managers has emerged that is more open to alternative investments and partnership models with private equity funds. Also, the factors mentioned above have led to a new pool of restructuring opportunities, as banks unwind stressed loan portfolios.
Compared to the rest of the world, how are portfolio company valuations in India right now?
In general, valuations in India look expensive, especially relative to other markets. For instance, India’s median deal multiples in 2017 were higher than the median in Asia-Pacific. Valuation is a challenge in India because everyone is investing for high growth. However, CDPQ investment decisions are based on fundamental values and long-term returns.
I would say valuations in India are high, but I hesitate to say overheated as it depends on many things. For example, if you look at the banking sector in India, you have banks that are highly valued in comparison with their counterparts in the West or even in other growth markets. Yet, when you consider the fact that 47% of the population is still unbanked, and even the other 53% is touching the surface of what banking services can do for individuals, we feel this is a market with opportunity for consistently high growth.
What are the competitive advantages you feel India-based GPs have to offer, as compared to global managers?
India has a set of well-established local private equity firms with deep sector expertise, strong operational teams to create value for their portfolio companies and existing, well-entrenched relationships with the Indian business ecosystem, enabling them to deliver competitive returns. When identifying local Indian GPs, CDPQ takes a close look at their India portfolio and seeks those that can bridge the gaps in the CDPQ private equity portfolio.
What are some new developments CDPQ is pursuing in the private equity space in India?
CDPQ’s mantra is to work in partnership with local firms. We have tied up with high-quality Indian partners as mentioned above. In 2019, we really want to build the private equity portfolio further with our existing and new partners, and possibly in new sectors such as healthcare and technology investments, and more in the financial sector – all are big on our agenda.
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