'PEs that survive the next 18 months will win'

The frenzy in private equity investment is over, at least for now. And, gone are the days when PE investors used to virtually chase promoters.

The sharp fall in markets has also delayed exit opportunities for PE investors. These are the views of the president & CEO of IDFC Private Equity Group, Luis Miranda, who spoke on various issues relating to private equity in an exclusive interview to Business Standard.

Isn't it a challenging time for private equity players?

Yes, there are many challenges before us. During 2007 and 2008, PEs raised good amount of money.

Now when the economy is slowing down, it is becoming difficult to raise funds. Investors are also asking tougher questions like what will be the theme for investment, what will be the investment strategy, performance projections and so on.

The hype that was created in the sector has certainly disappeared.

What is happening now is that some PEs have started looking at high networth investors, rather than institutions for raising money.

This is risky as PEs  need long-term capital and institutions are better placed to provide such money, although nowadays it is tougher to raise money from them.

Another challenge is that PEs are taking longer time to close deals.

Are there enough opportunities when the perception is that things may turn worse before they actually improve?

Investment opportunities are of two kinds. One is financial, which is purely based on valuations, and the other is finding sectors and companies.

In terms of valuations, the way infrastructure stocks have been hammered down, they are good bet for a three-year horizon.

Even if individual companies as such may not be highly placed in the market to grab the opportunity, valuation-wise they may be good investments.

The year 2009 may be difficult for the transport sector.

But 2010 may turn out to be a superb year for the sector. The power sector is good, but high valuations are making investment decisions difficult. Good opportunities exist in power ancillaries.

In the clean energy sector, wind energy and bio mass look good, but there are execution challenges for such projects. Education is also good, but the problem is there are not enough good cases for investments.

Over the last few years, PEs have been making investments and 2008 was considered to be a year for profit booking. What is the status?

Yes, exit has become the biggest problem for PE investors. Planned profit-bookings or major exits have not happened in 2008.

Exits may remain tough even in the first half of 2009 as there seems to be a lack of buying interest. Sometimes, if there is a buyer, valuations don't look attractive to sale.

Serious exits in equities may be seen in 2010 unless some investor is desperate to exit. PEs have to focus and structure proper exits.

Management buyouts were an emerging trend last year. Will that trend re-emerge?

The Western model of buyout is dead. Such buyouts were leveraged, thus required debt funding.

If there are opportunities where a buyout is possible without leverage, such deals can be possible.

Exits are difficult, markets are down, economy slowing... Isn't everything looking gloomy?

Let me put it this way. We raised a total of $1.6 billion in 2008. Out of this, we have invested $200 million and sitting on cash worth $1.4 billion.

We are, hence, well-placed to grab any opportunity that comes up. This is not the case with everyone.

In India, a lot of money is available but people are scared to invest. I am sure the equity market will be at much higher levels than what it is at present towards the end of 2009.

The key is to survive for the next 12-18 months. This is tough, but whoever survives will be the winner.