The Indian consumption story is perhaps the key reason why private equity investors flock to India. Many are keen to look at investment ideas in the space. Apart from private equity players like Everstone, Warburg Pincus and Sequoia, FMCG Unilever, the maker of Surf detergent and Lux soaps, is also setting up a corporate venture fund to back small- and medium-sized businesses in India and China. So has Wipro chairman Azim Premji through Azim Premji Invest, an over $ 1bn fund.
Is investing in the so-called Red Hot sector getting too competitive?
“It need not be competition only, we work with corporate venture capital funds,” said Shankar Prasad, Senior Vice President of private equity fund Everstone Capital. However, the collaboration between private equity funds and corporate venture capital funds is necessary also because of lack of too many investment options.
The fact that PE funds are acquiring consumer companies outside India indicates the dearth of good targets in India. Reuters
While addressing a packed audience at the Bengaluru Investment Forum 2011 organised by data company VCCircle, Vikram Nirula, partner at India Value Fund Advisors, highlighted challenges while investing in the consumer space. He said that private equity investors like to enter at an early stage and there are not many companies that appeal to them. He also said that brands are too young and usually businesses are run by single entrepreneurs.
Unilever could face similar challenges when it floats the fund and looks for targets to invest in India.
“A diversified portfolio is proposed, investing in funds which maximise the potential strategic options to Unilever, from smaller companies to mid-size companies,” a Unilever spokesperson said in reply to an email query from Firspost.
Unilever set up its corporate venture unit in 2001 with an initial fund of €250 million. A second fund was subsequently raised in 2006. The fund size would be around Rs 695-900 crore ($150-200 million) initially and money could be raised from external investors too, said a Mint report, quoting an unnamed person associated with the private equity industry.
In the consumer space in India, Kishore Biyani of Future Group, has set up a fund to invest in various aligned businesses to consume retail. Companies are looking to incubate new ventures internally.
However, in the consumer goods space, where investors are looking to pick a winning brand, there is a perception that there is no need for capital. “We find entrepreneurs in the consumer space feel that there is no need for capital,” said Everstone’s Prasad. An example is Chennai-based CavinKare. Any banker will tell you how he or she has approached the company over the years with a mandate to pick up a stake for private equity investors. The company has resisted any such move. CK Ranganathan, the founder and chairman of the company told mint earlier this month that the company could look at selling about 15-20 percent stake to private equity investors.
Niten Malhan, MD at Warburg Pincus India, said that entrepreneurs do not understand that we could help them create new revenue opportunities through acquisitions or grow faster by scaling up distribution reach in a market. He gave an example of Havell’s India where Warburg Pincus encouraged the company to grow through acquisitions.
Indian consumer companies are snapping up businesses overseas. Dabur, Godrej Consumer and Marico have all made strategic acquisitions in Africa and Middle East regions in the recent past. The fact that these companies are acquiring consumer companies outside India indicates the dearth of good targets in India. That indirectly endorses the view expressed by private equity experts.
Firspost highlighted in May 2011 that the street can expect an interesting deal play in the consumer space.
