More PE for EP

Volatility or no volatility, THE appetite of private equity (PE) for stock broking firms refuses to peter out. Over the past couple of years, a number of PE players bought up chunky stakes in top-of-the-line brokerages like India Infoline, Sharekhan and Motilal Oswal. Now it would seem they’re going after the lesser-known, second tier of share shops. According to data from Four-S Services, a Mumbai-based start-up that provides research, financial consulting and business content services, 2008 has already seen four deals in the space aggregating $95 million (Rs 380 crore). This comes on the heels of $700 million (Rs 2,800 crore) invested in 19 deals in 2007. In the current year, Citigroup Venture Capital International (CVCI) has invested $42 million (Rs 168 crore) in the publicly-listed Global Capital Markets, a Delhi-based broking and clearing house; Sequoia Capital India has picked up 29.1 per cent stake for Rs 120 crore in Delhibased financial services firm Unicon Financial Intermediaries; New Vernon/ICGQ has invested $14.4 million (Rs 57.6 crore) in Prime Securities; and Halcyon Group has invested $8.5 million (Rs 34 crore) in Anagram Securities.

But in an environment of dwindling volumes, negative sentiment and poor appetite for risk, why are PE players rushing where investors in equities fear to tread? The answer might just lie in that unknown realm called the long term. Says P.R. Srinivasan, Managing Director, CVCI: “In the coming years, economic literacy and equity culture are going to dramatically increase—this is a megatrend. Demand for simple equity broking services as well as sophisticated wealth management services for the mass affluent class will grow significantly. While banks will also compete in this space, significant market share will be taken by Indian brokerage houses that can provide these services very effectively and very efficiently using internet technology platforms.” Clearly, Srinivasan isn’t fazed by the volatility and uncertainty. “PE investors’ appetite for this market sector will not change (because of the shortterm volatility).We saw the potential and made our first investment in the sector a year back. In fact, I would see more investment being made in the brokerage sector in the coming months,” he adds.

According to the brokerage houses, PE investors are interested in the brokerage houses/financial services because it is a high-growth sunrise industry. Some of the companies are growing between 50 per cent and 100 per cent annually, and a few by even over 100 per cent. Profit growth is even more rapid. The total equity business in the country is likely to grow by more than 30-40 per cent in a year or two and there is likely to be a lot of consolidation in the industry.

As Jaideep Arora, Director, Sharekhan, says: “Consolidation will definitely take place. Over a period of time I see there will be five or six very big players.” Anand Rathi, Chairman, AnandRathi Securities, which raised around Rs 100 crore from CVCI by divesting close to 20 per cent last year, is once again in the limelight; this time it has caught the fancy of New Vernon, a $1.4-billion (Rs 5,600-crore) private, Indiaspecific fund from the US, founded by former Merrill Lynch honcho Arshad Zakaria. It is understood that AnandRathi is expected to divest around 15 per cent for approximately Rs 400 crore, a valuation growth of five times, within a year, to New Vernon. Rathi says: “Besides brokerages, the businesses of wealth management, distribution, insurance and mutual funds and investment banking are also going to grow fast.” And silly you are racking your nerves about a US recession!

— Anusha Subramanian