India or bust?

Recently, AVCJ held the 10th annual India Forum, which gathered the biggest names in the industry, including LPs from around the world, internationally recognized GPs, economists, strategists and service providers. Every aspect of the industry got its place in the sun, and all parties also got their share of friendly bashing, particularly as the debate over public versus private markets deals emerged as a continuing theme.

 Interestingly, although the opinions were often unwavering and the views clearly defined on all sides, everyone agreed that India had recently become too hot – too seemingly opportunistic – and industry, particularly among newer firms that did and do not truly understand private equity in the Indian context. The phrase, “separating the men from the boys” was used more than a handful of times, and is a trend that LPs and GPs alike welcome to refocus eyes, ears and hype back on those who are in fact consistently engaging in classic private equity.

The Indian context

When asked if there were too many private equity firms in India, not a single respondent answered no. Some may have qualified a “yes” by saying that in the future, there would be room for any number of players. However, the LP community was far more interested in long-standing firms, with consistent performance and deep-rooted local experience and knowledge. As one senior executive at a large private equity firm said during the cocktail reception hosted by Centrum on the top of its new building, “You need to know someone who went to school with the promoter’s uncle, who can leverage his relationship to make sure you know what you’re getting into. Without that, who knows what you might sign up for? Unless you’ve been here, on the ground, you just can’t do that.”

Harsha Raghavan, former MD and Head of India for Candover added during a panel, “The story of those investing on a fly-in, fly-out basis is not a good one.” The intricacies of working in private equity in India require, as he put it “market intelligence, knowledge of the regulations and an understanding of deal nuance.”

Working with management also requires a special skill set, most notably because “In India, the entrepreneur is king,” explained Anubha Shivastava, MD, Asia, CDC Group.

Nobody disagrees that entrepreneurs are an emotional bunch, and have a personal – if often somewhat irrational – view of the intrinsic value of their company. As such, the relationship between private equity firms and management is a delicate one, and can often be volatile as well.

While some, like Shankar Narayanan, MD at Carlyle Group, believe “the key is the working relationship,” and “control is overrated if you want to change everything in the company,” others staunchly disagree. Sanjay Nayer, CEO of KKR India, says there is “a huge difference between control and non-control,” and that the former is far more preferable.

For instance, knowing that a firm could take legal action can be more effective than going to court. Gaurav Mathur with India Equity Partners said, “If people know you will take legal action, that does a lot to enforce it. Now, if you go to court, that can be different.” Added his co-panelist Dimple Sanghi, MD for Private Equity at Everstone Capital, “The last thing you want to do is go to Indian courts. Whether you win or lose, the money is still gone.”

In the packed corridors between sessions, delegates noted that foreign firms often take this particular issue for granted – yet another point scored for local firms with local knowledge.

Competition, but not in private equity

Unlike in other, more developed markets, Indian private equity firms seem to be competing with everyone except other firms. Sandeep Naik, Co-head of Apax Partners India Advisers explained, “Our competitors are other forms of capital: sovereign wealth funds, QIPs, PIPEs, banks, and even those who are alternative investors in other ways.” This was echoed by Vishal Bakshi, MD for Goldman Sachs, who said, “Capital markets are the largest competitor to private equity,” during a panel that differentiated the trader-like mentality of those types of public markets deals from the long-term, value-add that private equity firms should be offering prospective portfolio companies.

“GPs continue to evolve,” noted Raghavan, “trying to assess introspectively what to focus on.”

“That issue will continue to plague GPs,” said Mahesh Chhabria, Partner with 3i, “the question of public markets versus pure private equity.”

While one would expect private equity professionals to argue against the value of private equity in any geography, one of the more compelling points came from a banker, Munesh Khanna, MD for Investment Banking at Centrum Capital. “Private equity has a very different skill set than a stock picker, and in that way, private equity has a significant role to play in India. It’s something that is still evolving.”

Across a number of discussions and debates, speakers pointed specifically to roll-ups, consolidation and aggregation among a variety of sectors as ways for private equity to show the value of its value-add.

In short, as Naik of Apax put it, “If the only thing you are looking for is capital, then we are the wrong partner.” However, “Change will come when some of us demonstrate the ability to grow a company better than others,” concluded Amit Chandra, MD at Bain Capital.


Infrastructure, but with a twist

The starting point for the discussion on infrastructure was one which some may not have expected. Whilst the need for infrastructure in every sub-sector comes as no surprise, in a speech by Shubhashis Gangopadhyay, Director of Research for the India Development Foundation, the market drivers for India’s growth surfaced to give the cause support and a foundation of commercial viability.

“The real economy is poised for some major changes,” he said, noting that rural India and the rural economy would become the driving force for growth. For landowners, laborers and farmers, earning power is on the rise, and is slated to continue, outpacing growth in urban centers. However, even the leading sectors in non-urban environments, including steel, power, metallurgical industries, cement and increasingly manufacturing, are thwarted by the lack of infrastructure, and consequently the ability to distribute goods to the end user efficiently and cost-effectively.

Ajay Lal, MD at AIF Capital, noted that the pharmaceutical industry in India boasted over 150 FDA-approved facilities, and that the government was looking to make India a top five pharmacological hub by 2020. But even with a seemingly positive head start, “the time delay” due to lack of infrastructure “can be irritating and damaging on returns.”

Likewise, although rural opportunities appear to be the key to future growth, MK Sinha, President and CEO of IDFC Project Equity, explained that, for manufacturing, “the bottleneck is the ports. Currently for manufacturing, these companies cannot guarantee timely delivery, but if roads and ports improve, that is the key to GDP.”

Sinha is bullish on the prospects for both ports improvement and the building of roads and tolls, believing in the case of the latter that the volume will make up for the currently very low cost. Krishan Sehgal, Founder of Kaup Capital Singapore and former executive with the International Finance Corporation, said that India’s toll rate was “a fraction” of the six cents per kilometer used by the IFC as a benchmark.

Whatever the theory, “there are huge opportunities in highways and roads,” said Shiraz Bugwadia, Director at o3 Capital, noting that on the ports side, “you have to be selective, and lucky.”

On the softer side of infrastructure

Social infrastructure deserves just as much attention, as panelists focused on education, healthcare, and to some extent tech services, pointed out. In this vein, local firms have an advantage, with education a tightly regulated sector. Amit Chander of Baring Private Equity Parners India pointed to government policies as one of the most effective ways to start an upward trend. “Policies of the government have had far-reaching effects” in social services, particularly for healthcare, as pharmaceuticals have growth, not based on innovation, but on government commitment and the follow-on of private capital.

Likewise, this could be applicable to education, which is in desperate need of more private funding. “The government needs to let the private markets take control,” said Sandeep Aneja, MD at Kaizen, who described the overall education landscape domestically as “pretty sorry.”

Healthcare seemed to be more attractive on the face of it, with everything from hospitals to diagnostics laboratories to generic pharmaceuticals open for investment. In this way, innovation once again requires infrastructure. As Chander said, “The markets here work different from other economies. Distribution is always the roadblock for companies that may not see their full potential because costs are lost in distribution and supply chain logistics.”

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• Topics
• South Asia
• Infrastructure
• People
• Amit Chandra
• Mahesh Chhabria
• Shankar Narayanan
• 3i Asia Pacific
• Bain Capital Asia
• The Carlyle Group
• IDFC Project Equity