How India is feasting on Chinese PE leftovers

Finding investor capital is hard for Indian private equity. It's time for international investors to stop perceiving the country as so risky, reckons Subbu Subramaniam of MCap.
How India is feasting on Chinese PE leftovers

International investors should evaluate the real risk of investing in India objectively, reckons Subbu Subramaniam, founder of MCap Fund Managers, which manages an India focused growth capital fund.

He speaks from experience, having been in the private equity industry in India since 1997 and having gone through the rough and tumble of the PE lifecycle with more than 20 investments and seven exits.

He founded MCap last year and its first fund is targeting a size of $250 million. The fund has achieved first close of $60 million. “We are in talks with a Japanese investor and are evaluating an extension of the final close of the fund to facilitate their investment. Currently our largest investor is a Middle East-based fund, alongside a pair of Indian investors and a family office in New York.”

“Global investors’ risk perception of India is distorted by distance,” says Subramaniam. “The investor community is comfortable about risks in developed economies like the US, because they can feel the pulse of the markets. The comfort comes from seeing and knowing exactly what is going on and hence one can respond quickly to any situation.”

He feels that readings from the unemployment data, the debt levels, housing numbers and other fundamental indicators show that economies such as the US appear far more risky than India, what with a potential risk of a ‘double dip’ recession.

“India, on the contrary, has the tail winds of strong and sustained economic growth of the order of 8%”, he says.

India’s domestic consumption patterns are only marginally affected by the global turmoil, given increased urbanisation, rising per capita income and the burgeoning aspirational middle-class demanding better products and services.

In the larger global economic scenario, the debate in India is whether it will grow by 7% or 9%, providing a base case of 500% more growth than the forecast for the West.

Having said that, he acknowledges that China as a market has consistently delivered superior and higher returns on funds invested. Therefore, capital will continue to flow to China and only the “overflow” caused by compulsions of prudent capital allocation will find its destination in India.

So far the fund has made two investments – Jyothy Laboratories Limited, which recently acquired the India operations of Henkel AG; and City Union Bank, a South India-based private sector bank.

“We have a strategy to invest up to 25% of the fund in listed equity. We look for companies whose stocks are illiquid, with market capitalisation of less than $500 million, and where we are familiar with the management team. With over 7,000 listed companies, listing does not equal liquidity. There are many undiscovered stories on the Indian bourses.”

MCap India Fund has an eight-year horizon with two one-year extensions. "We are focusing on investing in sectors such as green energy, consolidation in the information technology industry, growth enablers like logistics, warehousing, and consumer-facing sectors. We will make 10 to 12 investments of about $15-25 million each.”

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