India's initial public offering (IPO) market is unparalleled globally, according to Eric Janson of PwC

India's initial public offering (IPO) market is unparalleled globally, according to Eric Janson of PwC

The PwC veteran said that the fundraising winter is still ongoing in an exclusive interview with Moneycontrol, citing technology, healthcare, and industrials as his top sectoral selections for transaction activity.

India, in the opinion of over thirty years of PwC veteran Eric Janson, is the most sought-after location in Asia for private equity investments.

Global private equity companies are paying close attention to India's thriving capital markets because they provide competitive advantages over other regions of the globe in terms of characteristics like value, stability, and dependability. During his visit to Mumbai, Eric Janson, the Global Private Equity, Real Assets, and Sovereign Funds Leader at Big 4 company PwC, exclusively talked with Moneycontrol.

Over three decades of experience at PwC, Janson thinks India is the best place in Asia for private equity investments. Technology, healthcare, and industrials are his top sectoral selections for transaction activity in India, he said, adding that the startup ecosystem is still in the midst of a fundraising winter.

Moneycontrol also met with Bhavin Shah, Leader of PwC India's Private Equity and Deals, who provided commentary on the legislative and policy environment as well as the function of private credit in meeting the financing requirements of Indian corporations.

Revised Excerpts:

Many would blame the private equity community's dismal year of 2023 on the rising interest rates. As a result, capital raising and exits decreased. How positive are you feeling about transaction activity and what input are you receiving from your international customers about 2024?

Generally speaking, I prefer to think of myself as rather positive. Deal activity has therefore been sluggish to rebound, and interest rate volatility has undoubtedly played a role. On the other side, however, I believe it's been incredibly encouraging to see that people feel quite certain that interest rates have peaked in most regions. In any case, knowing the maximum interest rate in advance provides some confidence to investors or private equity firms. They are more optimistic about the remainder of 2024 and 2025 since they know when that peak will occur, even if it is likely still unclear whether interest rates will decline over the following three, six, or twelve months.

That's encouraging to me, and it should provide us some good momentum for the remainder of the year. I believe it's important to consider other issues, such as geopolitics. It's difficult to ignore the amount of money that needs to be invested and the number of portfolio firms that these private equity funds own. As on my most recent count, private equity firms own almost 28,000 portfolio businesses. Churning and returning the money to limited partners (LPs) are necessary. Therefore, there are several tailwinds supporting this sector. Furthermore, I believe that stable interest rates will hopefully encourage some transaction activity in this area over the next months.

You've made a positive impression. Speaking about dry powder, companies like Blackstone have $200 billion worth that has to be distributed across the world. India has emerged as one of the world's shining spots in the last year. In your opinion, India is now the preferred location for international private equity firms operating in Asia?

I have very little doubt that India is one of the hotspots in Asia and the world at large. While Southeast Asia has some lovely features as well, there aren't many nations in the globe with GDP growth rates over two percent considering India's immense size, population of 1.4 billion, and GDP growth rate above six percent. Additionally, I have learned that there may be up to 7% reforestation at your growth rate. Few other nations of this size and trajectory—in terms of middle class and infrastructure construction aspirations—are seeing that kind of development.

In my opinion, there should be a genuinely positive attitude toward India. The fact that so many of our customers have made major contributions to this nation and city (Mumbai) is evidence of this idea that there is a lot of possibility in India. Many of our people want to allocate more funds for India. Deal volumes might expand five times by the end of this decade, according to publicly stated predictions, and you're simply not seeing that kind of growth anywhere. Thus, I do believe that a disproportionate amount of equity will begin to move into this region.

India is thus the most preferred option in Asia?

Yes, considering the sheer enormity, I do believe so. There is nothing else on this scale that has this kind of population, this kind of consumer demand, and this kind of real estate market.

Over the last several years, PE companies have been examining unconventional prospects. The Swedish company EQT has acquired BPEA, Grant Thornton US has sold a controlling share to New Mountain Capital, and we have learned that CVC Capital is interested in purchasing EY's Italian consulting division. In its native India, KKR acquired a controlling interest in investment bank Avendus. Do you anticipate that in the future, more PEs will be vying for control of other PEs, divisions of international accountancy and consulting companies, or i-banks? What motivates this situation and what investing philosophies behind these kinds of deals?

Indeed. Permit me to divide my answer into two halves. The first one you described included funds purchasing other asset classes or other funds of a similar kind. I believe there's a tremendous drive, particularly among some of the bigger companies, to manage an increasing amount of assets because it does enable them to provide their limited partners (LPs) and customers a more diverse portfolio. They may also operate their firm more efficiently across a variety of industries thanks to it. Therefore, I do believe that private equity funds would keep purchasing credit funds in order to enable them to provide their customers with credit products.

In my opinion, the LPs are really seeking large private capital customers who can provide them a well diversified, well-managed, and effective investment choice. Thus, I believe that we will keep seeing it on the side.

That's very intriguing that you brought up professional services businesses. There's a little self-interest there for me. It's encouraging to see the attention it's receiving since, in my opinion, it helps to highlight the value potential.

And some of these businesses' organizational structures are visible. They may have a specific functional specialization or are geographically located. It's a standard private equity strategy where you might consider a chance to grow some of those firms, either by expanding globally by purchasing several regions or by focusing on certain functional skills. It's possible that you want to combine your cyber and risk consulting business with a larger consulting company. It's challenging to integrate them naturally. However, it is rather efficient to be able to accomplish that inorganically. Private equity has shown a lengthy history of assembling such organizations from disparate parts.

Thus, I do believe it will be fascinating to see how it plays out. Because the majority of those kinds of firms are partnerships operating in many regions with varying capacities, they are quite complex. Cultural and regulatory concerns abound, and human resource management is crucial. Those are individuals who own enterprises. This isn't a monthly service or product sale. You are investing in these individuals; the question is, how do you keep them all on the same page and headed in the same direction? Thus, private equity has a lot of fascinating opportunities in this field.

Yes. Let's see how many of these scenarios work out for the departure plans. Let's now turn our attention to the startup ecosystem. Eric, is the startup and tech industry experiencing the aforementioned "global funding winter"? Do VC firms seem to be turning a profit again and writing larger checks more often than they did previously?

I don't believe that is happening just yet. I doubt that anybody could argue against it. A few years back, there was a phase when it did get a touch too frothy. Furthermore, I believe that individuals were pursuing expansion for its own sake rather than necessarily comprehending the financial performance or even the foundations of the company in which they were investing. It is, in my opinion, a period of time to evaluate what you already have and determine if you can write things off or truly get out of the investment and return the money. And I believe that has caused them to stop a little.

It's just a matter of time before some of the chances in that expanding area materialize again. However, I believe that many of those funds are genuinely assessing what they already have before investing a significant amount of additional capital.

Fine. Thus, we haven't quite left the woods yet?

Indeed. That volume hasn't returned, in my opinion. We still have some time until we see it return to its previous state, in my opinion.

Regarding the battle with the bulge bracket buyout PE funds for Indian targets, what role do you believe the sovereign funds and pension funds will play? When it comes to controlling stakes, do you think the former group will adopt the consortium path and concentrate on minority shares, or will they confront the PE giants head-on?

Due to the enormous amount of cash they must deploy, it's an intriguing segment of our market in which I am really enthusiastic. People tend to overlook the reality that the majority of them—indeed, I believe all of them—tend to be limited partners in the private equity firms themselves. They thus have to handle this innate partnership/conflict. It will be intriguing to see how that transpires. They have spent a great deal of time and money so far connecting with those LPs and transactions in order to co-invest alongside them.

That's where I believe you'll see a significant amount of money going forward. However, I believe they have all performed some calculations on this. Additionally, they may genuinely earn some profits in the field of direct investment. As a result, a few of them are constructing the necessary infrastructure so they can source and carry out agreements on their own.

Here is where they will also need to assemble their squads.

Build teams to handle such transactions, indeed. Some of them are prohibited from doing majority trades by law. Thus, I doubt you'll ever see them engage in majority transactions. However, a few of them can now also conduct majority trades. They seem to be becoming more and more important in the ecology we live in. However, I believe that will arise, and they will need to handle the dynamic between partner and investor against competition. There are only a select few with the necessary equity check size when these larger transactions close. And among the people who can make such kinds of arrangements are the sovereigns and the Canadian pension funds.

Which three Indian industries are most likely to have the highest volume of private equity transaction activity this year?

Without a question, technology will continue to be of great interest to the people living here, and they will need technological solutions to meet their demands. Thus, I believe it will remain a popular topic. Second, medical services next to and inside your infrastructure. I believe there have already been a number of transactions in that area. I believe there will be demand in industrial services or enterprises of that like. Infrastructure comes next. In my opinion, the one area where I anticipate growth is infrastructure. The energy transition that connects to the infrastructure is another option. Therefore, considering the size of the population in this nation, major investments will be needed in all of those areas—solar panels, wind farms, alternative energy sources, and electric cars, among others. And I believe there's a benefit there as well. Thus, I believe that during the next years, they will be some of the more active sectors and subsectors.

The growth of large, block acquisitions, usually spearheaded by private equity firms that had a substantial or majority ownership in these listed businesses, was one trend that materialized last year and corresponded with the optimism in the capital markets. Thus, it was a cleaning trade all at once. Is it something that has also been occurring on a worldwide scale? Or is this only an indication of how developed the Indian capital markets may be?

Indeed. In my opinion, it's mostly an Indian phenomena. However, I believe you'll see an increasing number of these kinds of transactions taking place outside of India—I'll talk especially about North America here. Regarding what the seller or the PE fund may have an investment on their books and what the market will yield for them, there is still often a discrepancy in expectations. And that, in my opinion, is still creating a little pause. Private equity firms are reluctant to sell a company for less than what their balance sheet may indicate or what they believe to be a fair return. Therefore, I believe that they are still a little more patient and will hold off on selling until they feel that the value is acceptable. As a result, some other markets are seeing a little bit more of a delay.

The rise in initial public offering (IPO) candidates is another effect of the financial markets' buoyancy. Global private equity players support and actively push a number of these IPO prospects. When you look at private equity investors trying to leave the market, what is the worldwide dynamic? Do they have a look at secondaries? Do they want to examine traditional M&A auction procedures? Or is the current trend moving toward the public markets in hopes of receiving a higher valuation? I've seen that M&A deals in India often halt, and the same target eventually becomes an IPO contender.

In many aspects, the financial markets in India are a luxury for you all. In comparison to the rest of the globe, this country's IPO market is now, for the most part, unmatched. Because of the values you get and the stability and dependability the market has recently offered, the majority of our customers are definitely keeping an eye on the IPO route. That's not nearly as common in Europe and North America. There are indications of a rebound in those markets now.

A few of years back, all sell side activity followed a two-track strategy: either go public or sell to a strategic or private equity fund. That has definitely disappeared during the last 18 to 24 months. However, there are indications that the IPO market—specifically, the US market—is beginning to revive. In light of some of these exits, I believe they will continue to take it into consideration, but not nearly to the same degree as we are seeing in your stock markets here, which have presented incredible opportunities for both private equity firms and retail investors. It is unique as a result.

What is your outlook for the future development of the Indian real estate investment trust (REIT) and infrastructure investment trust (InVIT) ecosystems, and what has been the current status of performance?

Excellently. I believe the market will continue to have a lot of momentum. The amount of building going on and the demand for business real estate, particularly high-grade commercial real estate, are both evident as you drive about this town. Private cash will probably keep pouring into those kinds of possibilities. Afterwards, turning them into REITs so you can provide the investor a return on their investment. I believe there is a very significant interest among Indian investors, including individual ones. Because of the tailwinds you have here, I believe you have a fantastic fit there, which will provide a very wonderful result over the next several years in this market.

In the future, which of the leading international private equity funds do you anticipate becoming the most active in India?

On that one, I believe the politically correct response would be in order, and I wouldn't want to reveal specific identities. However, what's really intriguing to me is that the majority of the top funds—the ones with the largest assets under management—have evolved their investments across a variety of capital classes in a very deliberate manner. Additionally, they have given careful consideration to the areas where they want to expand and have exceptional development potential.

Fortunately for you, I believe India has some of those qualities, which offers these investors a very intriguing opportunity. And to take advantage of it, most have positioned themselves with a rather firm presence in this nation. Therefore, I'm not sure which player will emerge victorious from that, but I believe the top 5 or 10 players will be heavily involved in this over the next years.

When it comes to meeting India Inc.'s financing requirements, how much is private credit from private equity firms in India displacing conventional syndicated loans, and how would you compare the two?

Bhavin Shah: The total amount of private credit at this time is between $4 and $5 billion. This still represents a small portion of conventional syndicated loans. Private financing will only be provided to borrowers in situations when standard bank or NBFC funding is not available. Due to financing costs, the only industries in India where there is now private credit potential are real estate, infrastructure, and stressed assets.

Do international private equity firms anticipate any significant policy or regulatory reforms in India that will improve the flexibility and friendliness of the investment environment?

Bhavin Shah: India's current tax and regulatory regulations are very favourable to the acceptance of offshore private capital. It could take some more consideration to put these sensible measures into practice in an efficient manner, which will put foreign investors at rest and eliminate any doubts about the tax and regulatory assumptions they made before making their investment.

For the long term benefit of India, it is necessary to resolve the unwelcome uncertainty that changes to the capital gains tax structure have often caused for investors.