Powering India’s Growth

On a busy Saturday afternoon, between meetings with investee companies, conferences with global partners, deal negotiations and a dozen other things he has to attend to, Amit Dixit, senior managing director of Blackstone India, meets with BW Businessworld and discusses the firm’s global and India businesses.

Outside the US and Europe, India is the number one private capital investment destination on Blackstone’s priority list, even ahead of China.

Eleven-year-old Blackstone India is the largest private capital investor in the country. The global private equity (PE) firm has deployed more than $6 billion in the country, both in private equity and real estate. It is also the largest private capital player globally, with a corpus of $360 billion. The firm has interests in real estate, private equity, fund-of-funds, and credit.

As a result of Blackstone’s enormous work and its value creation in assets, the Indian economy has seen hard asset creation of steel plants, roads and infrastructure, totalling to nearly $10 billion! These investments have created 1.55 lakh jobs in India and also given other businesses, around its investments, room to expand, which in turn have also contributed to India’s tax earnings.

Like Blackstone, many other successful PE funds have been placing valuable capital in India’s high-gross-domestic-product-growth economy. Thereby, contributing towards the improvement of production and distribution efficiencies, creating valuable brands, and scaling up organisations in order to enable them to effectively compete globally. All of this has resulted in creating enormous wealth for shareholders, partners and stakeholders.

India Stands Tall
India is a priority PE investment destination because of its entrepreneurial and hard working-commitment culture; large pool of English-speaking talent; a hugely underpenetrated domestic market; and a strong global export market.

Dixit considers the Indian market more open to PE deals. He says, “We have now seen the Indian markets, especially over the last five years, really mature. We are witnessing control-oriented transactions in our chosen sectors where we can write large cheques, which was not the case 10 years ago.”

About two decades ago, the Indian PE capital barely scratched $200-300 million (Rs 1,250 crore – Rs 1,850 crore) in deals annually. Today, the size of the PE industry is $16-18 billion (Rs 1,08,000 crore – Rs 1,21,500 crore). Over the past three years, PE players have invested in more than 4,000 companies across a diverse group of sectors, and this number is continuously rising.

According to Niten Malhan and Vishal Mahadevia, managing directors at Warburg Pincus — which recently celebrated its 20th anniversary of investing in the country — India remains a compelling investment destination, and they are excited by the existing opportunities. Warburg Pincus has invested over $3.8 billion in India.

Says Malhan, “India remains a compelling investment destination for us for several reasons: a growing consumer-led economy; a diverse base of very high quality entrepreneurial talent; robust capital markets; and strong and stable institutions.”

In 2009 — after three years of being an investor in the market — KKR opened its Mumbai office to further strengthen its focus on India. Led by its CEO, Sanjay Nayar, KKR has invested approximately $1.7 billion in India across 13 private equity transactions and has extended more than $3.2 billion of structured financing to business groups in India through its credit, non-banking financial company (NBFC) and capital markets businesses. It has also invested approximately $200 million from its ‘special situations’ business.

PE firms also aim to implement diverse strategies. While some PE firms prefer to take majority stakes and allow the investee company’s management to operate the company, others take small strategic stakes to provide only growth capital. There are also commendable players such as True North (formerly known as India Value Fund Advisors) that take a majority stake and prefer to run the investee company businesses. True North has a total corpus of $2 billion for its investments in India.

True North steps in when an investee company needs to get effectively professionalised. Says Vishal Nevatia, managing partner of True North: “Around 75 per cent of our capital is invested in companies where we a have majority stake. We like to buy mid-sized businesses and really scale them up into much bigger and admired companies.”

The Carlyle Group is also strongly committed to India. So far, it has invested $1.4 billion in the country. Says Shankar Narayanan, managing director and co-head, Carlyle Asia Growth Partners, the growth fund of The Carlyle Group, “Private equity is a catalyst for the transformation of investee companies and thereby, for adding value to India’s economy. In many ways, it is the capital from private equity that enables a country’s GDP to grow. It also fosters innovation.”

PEs also draw on their huge domestic and global networks and even have subject matter experts to take an investee company’s business model to the next level of growth. While PE deal-making was growing even before, the last five years, reminisces Multiples Alternate Asset Management founder Renuka Ramnath, have been very dramatic. “India deploys nearly $16 billion through PE, and this amount can double fairly easily because a large part of Indian businesses are still promoter-driven, so there is an enormous scope for value creation,” says Ramnath. Multiples has a corpus of over $1 billion for its investments in India.

The real opportunity, however, lies in scaling up business operations, which is a process where PE players impart their expertise, knowledge and even provide valuable support in client acquisitions to grow businesses. Says Neeraj Bharadwaj, managing director, Carlyle Asia Partners, who heads the buyout fund in India, ‘Private equity investing in India is different from other countries. Here, it is about growth and gains in EBITDA and not about cost-cutting or debt repayment.’

“PEs are not short-term investors. They are long-term capital builders and stable investors. They mostly always have a subject matter expert to see how they can take a business plan to the next level,” says Rajat Tandon, president of Indian Private Equity and Venture Capital Association.

Warburg Pincus also brings a mind-set of growth investing. The firm’s strategy is to provide ‘patient-capital’ and a ‘line of equity’ to enable entrepreneurs to pursue their dreams.

PE Drivers
PEs have a rigorous and robust investment decision process and trust matters most. One of the most critical factors driving PE investments is incorporating high standards of corporate governance.

Says Bharadwaj of Carlyle, “We bring expertise and help improve corporate governance. It’s not that corporate governance is bad, but an external board member can improve governance.”

As a relationship-driven firm, KKR is also deeply committed to building and sustaining long-term internal and external partnerships, grounded in trust and transparency.

The basic principle of PE investing is that it is typically for a three- or five- or seven-year period, with the probability of remaining invested for a longer time. Typically, PE does not rely on momentum-investing, but in creating deep-value. At Warburg Pincus, the key focus is on finding outstanding management teams and entrepreneurs to build sustainable businesses with. The firm believes in a partnership approach towards building and growing businesses.

Another key factor that PEs consider when looking for great companies to partner-with is well-reputed promoters. Background-checks of promoters are a big part of a PE’s due diligence process. Some companies receive funding very early because their promoters have an impeccable reputation. Says Vishal Tulsyan, chief executive officer, Motilal Oswal PE: “We see how effectively a company allocates capital, and also how it thinks about remunerating the core management team, and sharing part of the company’s equity with its core team. Currently, we manage approximately $500 million of private equity investments in India.”

Exits
The exit strategy for a PE fund could be in the form of an IPO or a third-party buyout. At times, PEs also sell their investments to other PE firms, if they get an appropriate valuation for their stake. Some plan their exits in advance. For instance, Blackstone draws up a five-year strategy before investing in a firm and then follows it up with regular meetings to assess how much of the business-expansion and brand-value goals have been realised.

PE Dealmakers
The key PE dealmakers are EY and Avendus Capital.

Says Ajay Shah, Partner, Transaction Advisory Services, EY, “Going forward, the confidence in the Indian PE market is expected to remain upbeat, which is evident from the record level of fund-raise plans announced in 2016. EY has been a pioneer in assisting companies to raise growth capital from PEs across sectors. EY has also assisted many PEs in exiting their investments through sale to another PE or to a strategic investor.”

Another well-established PE deal maker, Avendus Capital, is focused on financial advisory (investment banking). It is also building its alternative asset management and credit solutions business through KKR’s investment in 2016.

Says Ranu Vohra, managing director and chief executive officer of Avendus Capital: “India continues to be a cash-starved economy. If you total up the amounts needed across sectors even in a low-capital investment phase, they cannot be met by traditional sources such as public markets. There are areas like infrastructure that can benefit from specialised investing.”

Looking Ahead
According to Mahadevia of Warburg Pincus, “The economic environment is dynamic and re-energised led by the government’s pro-growth and pro-development stance.”

The scale of the PE Industry is expected to more than double to over $40 billion by 2025. In fact, in 2016, nearly 76 per cent of companies that had an IPO, were backed by PE or venture capital investments. With a focus on scale and high corporate governance standards, most of these companies have created further value for their new investors post the IPO.

Says Sanjeev Krishnan, Leader PE, PwC India: “Investors allocate capital by comparing the risk-free return. That conviction of higher returns that was missing some years ago is coming back now.”

In closing, its worthy to note that Blackstone India’s investments have generated an internal rate of return of 26 per cent in Indian rupee terms, and 23 per cent in US dollar terms, which illustrates its exceptional track record!