Aureos Capital is a specialist emerging markets private equity player, investing in small and mid-size businesses. It manages about $1.3 billion and operates in Africa, Latin America, South East Asia and Central Asia. It invests $5-15 million in companies, picking up a minority stake – the sweet spot being a 20-30 per cent holding. In India, it has announced plans to raise a second fund. In this recent interview in his Mumbai office, Mr Balaji Srinivas, Managing Partner, Aureos India Advisers Pvt Ltd, discusses the private equity landscape in the country and Aureos' plans. Excerpts:
At what stage are your plans to raise the second India fund?
We started three months back and are still in the process of raising the $200 million. Some of our first round investors have committed in principle to invest in the second fund. We expect to do a first close of $50-60 million by March and start investing. We will go towards $200 million by end of next year.
The global situation is difficult. A lot of US and European investors are uncertain about their allocations. You have to put in extra efforts, need to be more focussed on our strategy. India is a difficult market to sell now for obvious reasons. There are also too many PE funds. The last four-five years have not been good in terms of exits. There are some global headwinds and some India-specific headwinds.
What extra do you need to get investors on board?
Investors are certainly looking for funds which have had exits, which have a track record. They are looking for the kind of portfolio companies you have. What kind of valuations have you paid. Have you stuck to your strategy. People who have stuck to their strategy will find more favour than those who have not.
What was the size of your first India fund?
About $100 million. That has been fully invested. From that fund, we did 13 investments in India, Sri Lanka and Bangladesh; 80 per cent of the fund has been invested in India. We have had six exits – three we have fully exited, three we sold partially. Wherever we have exited we have made good returns, good IRRs, good cash multiples. Between two and a half and three times. In a 3-5 year period, that is good, because that would mean your IRRs would be in the 30 per cent region.
We are sector agnostic. We won't do capital intensive sectors. Services are one part of our strategy, but we have also done asset intensive but high operating margin kind of business. We have done one logistics company, which is asset intensive but has got high operating margin. We also invest in the manufacturing sector, especially in specialised manufacturing where we see a lot of value addition.
What was the method of exits in those companies you sold your stake?
A combination. One of the recent exits was in a company called Continental Logistics, where Warburg Pincus had invested $100 million. We sold some of our stake to Warburg. Paras, where we had a small stake, we sold to Actis. In Accutest Research Laboratories, we sold our entire stake to Greater Pacific Capital, a pan-Asian fund. There is a company called Dutch Lanka Trailers in Sri Lanka, which does large trailers for truck companies. About a year back, we completely sold it to one of the Tata group companies in India.
But you have not gone through the public markets?
Not in India. We believe lot of our companies are small in size to go for listing. Some of them might, but we believe that is not the most important element in our exit.
How has 2010 been in general for the PE industry?
If you split into three or four aspects – fund raising has been difficult, partially because of the global scenario and also because there are many more people raising money in India than what people would like. And the fact that the global environment has not been so friendly. From a fund raising perspective it has been slightly difficult. I think the investment side was okay, while there was a marginal slowdown in the last one or two quarters in terms of the number of deals that were done. It terms of exits, it has been challenging because IPO markets didn't do well and M&As were also not so good. From an exit perspective, it was a very average kind of a year.
What is the scene like for the next year?
I would think the global situation is a bit uncertain. Fund raising will continue to be a challenge in 2012. But, there are going to be some who will find it relatively easy because of their track record. It is not as if investors are saying no to India. They are saying we want to be particular about whom we invest with. In 2006, most of the funds did not have a track record and investors did not have too many data points to compare between funds. Now a lot of funds are in the second generation and there is a track record to compare. So, fund raising will be very selective while it will be difficult. Valuations might get attractive which is good. Another problem India has is that the valuations have always been expensive compared to the rest of the emerging markets.
What is that due to?
Different reasons. Too many funds is one of them. I think the promoter expectations are more. Competitive pressure is there within the funds. The growth rates have been high in the last four-five years and people said if the company is growing at 30-50 per cent it is okay to pay more, let us invest. I believe 2012 will be interesting from that perspective. I think valuations are stabilising and will stabilise even further. Exits will continue to be challenging.
With the public markets being volatile, those companies looking to raise funds will also be under pressure to…
If IPOs don't happen, they have to raise equity. Interest rates are going up and banks will say you get the equity. If IPOs are not available, they have to come to PE funds. There is lot of money available in the PE industry, people still have lot of money to invest. Valuations are reasonable, I think lot of investments have happened.
You are looking to invest in the smaller cities with your second fund…
That is another focus for us. We want to get into tier-2 and tier-3 towns. We have done one investment in Chhattisgarh in a company called BSR Super Speciality Hospitals Ltd, which runs one large multi-specialty hospital in Bhilai and a chain of diagnostic centres in interior Chhattisgarh. There are opportunities and there are not too many funds focussing on these towns.
Wouldn't it be difficult for you to sell this idea to your investors?
On the contrary, they are liking it.
Is there a fundamental difference in outlook between entrepreneurs in cities and those in smaller towns?
A little bit in terms of in the larger cities, promoters understand what a PE investor is, what to expect, what they are trying to do. In a tier-2, tier-3 city, I would think the promoter doesn't understand that. So, it is more time consuming. We spend more time to explain, it takes slightly more time to implement a few things. Closing deals also takes time.