PE may relook India strategy amid Subhiksha, Satyam: Experts

Collapse of discount retailer Subhiksha coupled with economic downturn and fear-psychosis created by the Satyam scam is leading private equity investors to rethink their investment strategies in India, mainly in those firms with significant promoter control, experts say.

"The Subhiksha incident will make PE firms more cautious on how much of a free hand they allow to a promoter. Some PE funds are concerned that promoters have a wide range of authority in their companies and could look to establish structures that would limit some of this authority," KPMG head of Private Equity Advisory Group Vikram Utamsingh said.

Meanwhile, SMC Capitals equity head Jagannadham Thunuguntla said success and failure are a part of the PE business.

"This is more true in case of unlisted companies such as Subhiksha as there is no exit option available for private equity investors. All PE investors live with this risk of illiquidity in comparison to listed firm investments,"he said.

About Subhiksha, he said its effort to match market value expectations forced them to open 1,100 outlets across India, a move that has created problems for the firm.

"This (Subhiksha) definitely raises the issues about the preparedness and scalability of Indian business and can put pressure on PE funds to re-look their investment strategy in India," Thunuguntla said.

Earlier, Subhiksha was doing fine till it had 180 outlets in the Chennai and Bangalore region over a period of nine years.

In an outlook for the PE space, experts said the combined effect of Subhiksha and Satyam incidence, credit market tightening and cash flow crunch would restrict any big ticket commitments by private equity funds in the coming years.

"However, for any cash-rich private equity fund, it is the right time to be opportunistic and buy stakes in quality companies at reasonable valuations," Thunuguntla added.

Meanwhile, as promoters are not showing any intention of reducing the valuation expectations, it is getting difficult for PE investors.

In 2008, the total number of PE deals announced stood at 312 with a total announced value of USD 10.59 billion. In January, the total number of deals announced were 14 worth USD 202.22 million as against 57 deals amounting to USD 1.51 billion in same month last year.

Most private equity firms have not yet disclosed any significant change in their investment strategies but an official from a leading PE fund said that the bullish phase is over for the country and they expect to generate lower returns in the coming years than the huge gains received in the past.

Domestic consumption and infrastructure-related sectors are likely to see maximum PE activity in next 12 months. The growing consumer class is increasing demand in key industries, like hospitality, retail and healthcare delivery.

"The government is willing to inject money into the infrastructure sector to maintain the momentum, therefore there will continue to be good PE opportunities,"  global consultancy Deloitte said in a report.

Meanwhile, KPMG Private Equity Advisory Group Head Vikram Utamsingh said that the PE scene in the country has fundamentally changed not because of Subhiksha or Satyam but because of the economic downturn and the stock market crash.

PE firms need to be much more focused on working with their portfolio companies to create value, he added.