Talking about the investment cycle in India, Multiples PE is basically a sector agnostic fund and looks at opportunities in each and every sector, says managing director and chief financial officer, Prakash Nene.
Multiples Alternate Asset Management Private Limited (Multiples) is an investment advisory firm that manages more than USD 400 million of Private Equity Funds. Multiples believes there are three ingredients to successful investing in India – careful selection based on conviction in the entrepreneur and opportunity; finding a solution beyond just providing capital; and mutual selection between the entrepreneur and the fund.
Multiples PE is now coming out with a second fund which is a 10-year fund with commitment amount of USD 650 million to be invested in 5-year time frame. However, they would be aggressively investing in the first two years on back of hopes that the Indian economy is now turning around, says Nene.
We are quite positive about the changes which are being made on the economic front. There are many incremental changes which are taking place and that is very heartening," adds Nene.
Althought the fund is sectors agnostic, spaces banking financial insurance (BFSI), e-commerce, healthcare will continue to be most attractive sectors, says Nene.
Below is the transcript of Prakash Nene's interview with CNBC-TV18's Kritika Saxena.
Q: Multiples PE since 2010 till date has been a roaring success if you compare it to the other domestic funds. You have raised USD 300 million funds which have been deployed already. How has the growth been given the fact that investing climate has been slightly slow ever since you setup. How have you been able to retain the investment pace and get the kind of success that you have gotten already?
A: We started in 2010 and the fund is slight bigger than what you thought because the dollar has depreciated otherwise we started with USD 400 million commitment. In terms of pace of investment we have been doing investment on a steady basis every year. We have a very strong investment team and lot of us came from another private equity venture and everybody is very experienced. So, we know the game and after all with all this whatever you do ultimately there has to be some external factors also which lead to success. So, we have to be very careful about where do you invest. In fact when you say our pace investment has been good, to begin with our pace of investment was very slow. We were very measured, our first investment took about a year to make.
Thereafter we really gathered pace because the team has to come together. Once the team came together that is how we started going forward at a faster pace.
Q: In your first fund what were your focus areas in terms of the average ticket size that you are looking at and the sectoral focus?
A: We are sector agnostic fund. We look at opportunity in each and every sector. In terms of verticals we look at certain percentage – 10-15 percent for early stage companies and rest of the companies are later stage companies. Our bias is towards later stage companies because our ticket size will be larger than early stage companies. So, USD 30 million would be our ticket size in the first fund. Obviously in the second fund it will be larger than that.
Q: Let us talk about your second fund; USD 500 million is the amount that you are looking at raising. What is the process and by when will you start deploying that? The fund amount is larger than what your other peer, which have seen average of USD 150-300 million, so what really according to you would be the focus areas and do you feel that now that this is a larger fund you would have a larger investment power to invest over the next couple of years?
A: First of all USD 500 million would be the main fund. We also have another vehicle. So, our total amount available for commitment will be USD 650 million. So, we would be deploying USD 650 million which is the target of this fund. We would be deploying that in just a matter of time now, we already have lot of commitments from our core investors. They are all coming back with larger tickets, so we have a number of documents already with us. We are just waiting to do a formal close.
Q: Typically, USD 650 million, roughly across how many year do you see that spanning out or rather the majority investment, would it be a 5 or 10 year timeframe?
A: Technically, the fund is a 10-year fund but what we call as commitment period, the commitment period would be about 5 years. So, 5 year is the timeframe where most of the investment will be made. However thereafter as well once you invest in a company there is a follow-on investment. The companies keep needing money from time to time and it is not that after 5 years company will not require any money. So, you set aside some amount 10-15 percent for follow-on investments beyond 5 years.
For the first 5 years normally we invest at a steady pace. It is not that you have to just divide by 5 and every year you invest USD 120 million. Our bias would be more towards the early years. So, the first couple of years we perhaps would be investing at a faster pace than the earlier year because we are quite positive that the economy is now turning around.
Q: Since 2010 till 2014 things were fairly difficult but the new government came in and we have seen things turn on ground. We have been talking about how the ease of doing business is now one of the top priorities for the government and how there is a pickup in the reform cycle. Do you feel that foreign investors are now looking at India differently and more positively in 2015 than they did in the last two years?
A: Absolutely. I would not say the last two years, I would say year before 2014, the pace of investment all of us know was very slow and things were pretty gloomy. However last year has been a decent year I would say. In the private equity sector I think about 400-450 deals have happened and the capital deployed is about USD 11 billion, which is a sizeable sum which was deployed. Exits have also improved now. Last year we had about USD 4-5 billion of exits and I think that pace will continue.
We are quite positive about the changes which are being made on the economic front. There are not too many what they call big bang changes, lot of people expect that suddenly things will be different and that doesn't happen but I would say there are many incremental changes which are taking place and that is very heartening. We believe that the government's policies are moving in the right direction. However once you change a policy there is some time lag once the economic activity picks up. So, on the ground the economic activity especially in manufacturing sector is yet to pickup, it is slowly picking up but certain other sectors things have started moving faster. So, we are looking very positively, the next two years that is the reason I said that perhaps the pace of investment which we are going to make in the next couple of years will be faster.
Q: Let us talk about taxation in that case; in the Budget this time around the government has created a big positive for the PE industry by allowing tax pass throughs. How significant is that for PE players and for Multiples PE?
A: I would say that pass through is one of the things which the domestic industry was looking forward to and which has now been granted. It is definitely positive for the industry. However what happens is that what you do at one place, you do something else in another place. What has been introduced in this Budget is something called Place of Effective Management (P.O.E.M). In the speech the Finance Minister has said that they are encouraging Indian fund managers like us to really manage foreign money without going abroad. Many of our colleagues have moved abroad simply from that angle.
Place of effective management is considered if you are based in India and if you are managing money in Mauritius or in other jurisdictions and those funds are called resident in India. If those funds are resident in India then they are not eligible for what is called treaty benefits. So, that is one clause – P.O.E.M has come.
Government has created what they call safe harbour rules. Safe harbour rules mean certain sectors of the economy and certain fund managers would be excluded. However what I find that most of those changes which have been made they are for FIIs – foreign institutional investors. Government has not looked very carefully as to what are the requirements of a fund manager who is not an FII but using FDI money.
FII is a regulated concept under Sebi but most of the funds especially private equity funds are not of that type. We typically will have 5-25 investors and not hundreds of investors. So, when you say that no single investor can have more than 10 percent in a company and all of us have an anchor investor which will be more than 10 percent. So, in that situation we will be excluded then you say 5 investors put together cannot own more than 10 percent and you cannot do a buyout.
Even in our first fund we own a company which is completely owned by us – 100 percent and buyout is a very important concept for a private equity. When a policy framework is made this is something which looks like inadvertently it has not been taken into account and I am quite hopeful that before the Budget is finally approved I think there will be some changes on this.
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