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Kotak reveals a sweet spot in Indian markets

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Huge opportunities exist in Indian companies that fall within the sweet spot between private equity investment and traditional open market investment, according to Prakash Ramaseshan, principal investment manager of Kotak India Focus Fund.

 

“India has over 5,000 listed companies, one of the highest numbers in any market in the world,” says Ramaseshan (pictured). “However, almost 75-80 per cent of the total market capitalization of India is accounted for by the top 80-100 companies. In our estimates an excess of 80 per cent of capital invested in listed Indian equities is through daily liquidity funds.”

Ramaseshan believes that this has created a large as yet underdeveloped opportunity within the Indian mid-cap sector as many companies are currently undervalued but relatively illiquid and therefore cannot attract investors easily.

“India is in a unique position compared to other emerging markets,” says Ramaseshan. “Not only is there increased stability in the country’s leadership, but economic growth and market liquidity is improving at a rate far higher than most other markets around the world. The majority of family owned mid-market companies have listed early and are under researched, so early stage investment in fast growth companies in sectors such as infrastructure and pharmaceuticals is still possible – providing good opportunities for investors.”

Almost half of all private equity deals in India occur in the listed space as the unlisted space is quite small. There is clearly a strong owner-manager culture in India and it is quite common for families to own 40-60 per cent of their business. This means that a traditional private equity holding of 15 per cent would necessarily enable rights that private equity investors gain by similar shareholding in other countries.

“Furthermore, if a company is trading below the value the owners think it should, then they are less likely to accept private equity investment,” says Ramaseshan. “Typically in such situations only distressed companies are open to inviting private equity investors. However, there is an opportunity to buy these companies in the secondary markets provided the investor can conduct a high level of due diligence on the company.”

Ramaseshan favours building up three to five per cent stakes in undervalued companies that would not necessarily be looking for private equity investment in the current market. This allows him to take up a “friendly activism” role within the organisation, thus helping to transform and drive the business forward in a subtler way.

KMUK will shortly be launching a second Kotak India Focus Fund using this strategy, following the success of the first one which launched in August 2007 and is presently in the end of its investment period. The fund will be targeted at institutional investors and family offices.

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