Q&A: The Everstone Group's Dhanpal Jhaveri

Q: What is investor sentiment like right now?

A: We have seen record amounts of new investment this year – close to $21 billion for the 10 months ending October, which is already more than the 2015 total of $19 billion. There has been significant interest in India, significant interest in investing in private assets. To that extent, sentiment is quite positive. We’ve also seen from an exit perspective, much stronger flow, capital markets-driven and trade sales, as well as private exits where investors are selling to other financial buyers.

Q: What is behind the strong flow of IPOs?

A: There are three factors. One, the amount of capital flowing into the Indian public equity market from the domestic investor community has grown significantly. This is on the back of a very strong swing from physical to financial assets, partly as a result of demonetization. A lot of money has come into the financial system and entered the equity markets, either directly or through vehicles such as mutual funds. Two, even though foreign capital flows into India have been slightly more volatile – there have been months when capital has flowed out rather than in – the markets have remained in positive territory. Every month the key indexes have delivered positive returns, something we haven’t seen in 10-15 years. Three, valuations have improved. Better-run companies are getting significantly higher valuations than similar companies in previous vintages. As a result, even private businesses that have similar business models and growth attributes are also seeing higher valuations and that is leading to more private businesses being taken public.

Q: Investors often talk about the IPO window as being open or closed. Is it likely to stay open longer this time?

A: These windows are driven by relative factors rather than absolute factors. A lot of them were driven by foreign capital flows. But for the first time, there is more domestic capital than foreign capital. Even if there are global issues – for example, a higher interest rate regime in the US, leading to a shift away from equities and dollar outflows from emerging markets – I think the impact would be reduced because of this domestic capital. Another consideration is that India’s politics and its economy are closely linked. For more than three years, the same party has been in power at the central government level and in more than 18 of the 29 states. This political stability is helping economic decision making and capital flows. At the same time, the interest rate environment has been benign and the inflation environment has been benign.

Q: How active has Everstone been in terms of exits?

A: We’ve done private sales and public sales, but more biased towards private. There has also been a fair amount of activity getting companies ready to go public. We took one public earlier in the year and two or three could follow in the next few quarters.

Q: As for investment, presumably you continue to see more buyout opportunities?

A: There has been a significant increase in buyout activity, not just by strategic players but by financial sponsors as well. Historically, most Indian entrepreneurs or business houses were loath to sell assets. They would only sell when in distress and there was no alternative, or if a strategic came in and paid a significant premium to anything that was traded. What’s happened over the last decade is that there’s no longer a social stigma attached to selling a company and sitting on a lot of cash. And from a buyer perspective, there is greater sophistication in how they run businesses, partly due to the high quality of professional talent available in India. The economy is also larger than it was 10 years ago. Mid-size businesses are available that can be scaled up and you can put a reasonable amount of capital to work. This makes it worth everyone’s while. Whether it’s a small investment or a large investment, the amount of work doesn’t change too much. So why not make that bigger investment and devote the time, resources and energy to making it work?

Q: Everstone also makes platform-style investments. How many do you have?

A: Indostar [a non-banking financial company] was one of the first platforms we built. We then did F&B Asia, which included quick service restaurant businesses in India and Indonesia. We are building a pharmaceutical distribution platform, starting with a small Mumbai-centric business, and we want to grow it across India. We also just announced an acquisition in Malaysia which will be the kernel around which we develop an Asia platform for distribution of medical equipment and devices.

Q: What is the rationale behind this approach?

A: Each situation has a different strategic driver. Sometimes we believe the economics of the underlying business are such that rather than trying to buy a company that is potentially expensive we would prefer to build one that would give us greater ability to generate alpha. In other cases, the market structure is changing and there is an opportunity for a player with differentiated capital to come in and build a scalable business in a short period of time. Finally, there might be wide open spaces in which you can establish a substantial business. With F&B Asia, it was a build strategy in India and a buy-and-build in Indonesia. Building is much tougher. It requires a lot of work and everything must be built from scratch or from a small starting point, so we must be that much more confident in our ability.

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• Topics
• South Asia
• Buyouts
• GPs
• Everstone Capital
• India