The historic electoral win for Narendra Modi-led Bharatiya Janata Party makes for two pronged repercussion for the private equity and venture capital fund managers. On the one hand it is expected to improve the investment climate with change in policies it is also expected to de-clog the exit pipeline with revival in IPO market and strengthening of local currency making it more lucrative to sell and repatriate the moolah as far as GP’s managing offshore funds are concerned.
Many fund managers that VCCircle spoke to are expecting good governance structure with key policy changes in the infrastructure space.
“Expectations from the new government are reasonably high especially given that the strong mandate for governance and development they have received. A key part of those are getting the private investment cycle restarted, which will have knock on effects in all parts of the economy. Continued focus also needs to be given to bringing government expenditure and the fiscal deficit down,” says Pavninder Singh, managing director at Bain Capital.
Another fund manager of a global private equity firm on the condition of anonymity said, “The problem we had with the earlier government was not that they did not know what to do but they never empowered their people to take decisions.”
“At least Modi’s governance style does not interfere in the day to day decision making process. He gives clear objectives to the bureaucrats and lets them execute. So the focus on execution is going to be positive across sectors and obviously the impact will be largest on infrastructure,” he added.
“If you look at Mr Modi’s track record in Gujarat, he has a very systematic, detail oriented execution. The country needs to see a lot of execution on regulatory and policy matters,” says Niren Shah, managing director at Norwest Venture Partners India.
Some expect infrastructure to be a kick-starter.
“Within 9-12 months, infrastructure and capital goods would be in vogue because these were the sectoral focus for Gujarat where Modiji comes from,” says Sanjeev Krishnan, leader private equity, PwC India.
“If regulations like single window clearances for infrastructure projects come into place, it will get people excited about manufacturing and this will create the eco-system in India which will excite overseas investors. This will lead to a huge leg up for foreign investments in the country,” Krishnan added.
Though most of the fund managers are positive on infrastructure sector seeing a turnaround, they also expect real estate demand to rise for the long term.
“The changes that come in should give impetus to the economy; create jobs because ultimately the demand in real estate comes through job creation. What happened in Gujarat was easing of regulatory approvals, this should be extended to other parts of the country,” says Balaji Raghavan, CEO and CIO, IIFL Alternate Asset Advisors.
Fund managers are also expecting easier land acquisition rules from the Modi-led government besides changes on the taxation front.
“Taxation is a big killer and that is where the large hard dollars will wait for complete clarity before entering,” says the fund manager quoted above adding, “We cannot afford any more Vodafone or Nokia-like taxation issues.”
Manufacturing, financial services and agriculture are also expected to witness a leg up from the new government. “With the growth cycle kicking in and lower inflation, there will be a fall in the interest rates which will improve the margins of SMEs. This will in turn help PE funds to exit at a good IRR as their investee companies will generate good margins,” says S Harikrishnan, managing director, Avigo Capital.
“I am expecting big long term secular cycle starting with banking and finance sector, maybe even insurance. I feel that lot of real asset sectors like manufacturing will see lot of efficiency and productivity from bottlenecking. Sectors like real estate, infrastructure and even agriculture will see lot of policy-driven growth,” says Norwest’s Shah. Norwest has been active in building its exposure in the financial services space in India in the recent past.
With the stock market showing positive signs from Modi’s victory, PE firms also see it as an opportunity to exit.
“The exit opportunities will increase through either an M&A or an IPO, a better visibility for my exits. There will be a reasonable amount of rupee stabilization against the US dollar,” says Harikrishnan of Avigo Capital.
Bain Capital’s Singh says as the public markets reopen for primary capital raising through IPOs or QIPs, which is the market expectation, that will again provide an alternative to private capital and potentially increase the valuations promoters are willing to accept.
Overall, PE fund managers expect a healthy revival of economy in the country with a controlled fiscal deficit and faster execution of regulations and approvals.