Private Equity in India

An executive roundtable

Private Equity in India

about spencer stuart Spencer Stuart is one of the worlds leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients ranging from major multinationals to emerging companies to nonprofit organizations and address their leadership requirements. Through 51 offices in 27 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments. For more information on Spencer Stuart, please visit www.spencerstuart.com.

Spencer Stuart, India hosted a roundtable discussion in Mumbai on private equity which was attended by leading practitioners in the private equity sector. The session was chaired by Abhay Havaldar, General Atlantic, and facilitated by Tom Neff, Spencer Stuart.
India has seen a boom in private equity activity in recent years, with the growth of local funds and the arrival of global players. The particular situation in India characterised by family-owned companies, a huge listed sector, widely available capital, and yet a relative lack of liquidity in the market means that private equity firms need to position themselves as partners if they are to become the preferred source of investment capital. Beyond their financial contribution private equity firms need to be able to add value, as required, in strategic, operational and human capital matters. Private equity firms can and do have a positive influence on investee companies when it comes to finding leadership talent, for example, or improving the composition and governance of boards. But private equity investments inevitably go hand in hand with an exit strategy and investee companies are not always comfortable with this point. The opportunities and challenges facing private equity firms in India were discussed in detail at the roundtable, and a summary of the proceedings follows.

Private Equity in India

Introduction
The Indian economy has been enjoying a period of sustained growth at around 8 per cent a year. The latest boom has attracted the attention of private equity houses who have been participating in an unprecedented number of investment deals. In sharp contrast to the time private equity funds invested in India from a base overseas (for example Singapore), many private equity firms have now established a presence in the country, spurred on by a bullish market and some spectacular and well documented exits. This reflects the importance of understanding local markets and working closely with promoters (families or controlling shareholders), as well as the benefits of local decision making. The Indian private equity market is different from that of Europe or the United States in that small family-owned and family-managed businesses account for a high proportion of the market and therefore investment opportunities. The average deal size in India is significantly lower than in China or South Korea, for instance, but 8,000 companies are listed on Indian exchanges, a huge number by any standard, and the rising performance of the stock market since 2004 has resulted in substantial wealth creation for families with majority stakes in listed companies. Among non-listed family companies there has been a traditional reluctance to share ownership and surrender control. However, there are signs that private equity firms are willing to play a more active advisory role in parallel with their ability to raise growth capital a prospect that owners and promoters are starting to find attractive. As well as providing capital and financial expertise, private equity firms are in a unique position to introduce new disciplines and much needed structural reforms, for example looking closely at the quality of management teams or challenging companies to introduce leadership succession plans. There has been phenomenal growth in the value of private equity investment in India over the past decade. With an expanding domestic market and additional opportunities brought by globalisation, the impact of private equity on Indian business is likely to increase further in the coming years.

Why is private equity attractive?

Anjali Bansal observed that it has rarely been easier to raise money from banks in India, so why are companies choosing to take private capital for expansion or acquisition purposes? It seems that Indian companies are becoming increasingly aware of the value that private equity firms can add. It was suggested that for many Indian investee companies, private capital provides the means by which they can get mentoring and advice without having to go to public markets. For example, one major company had the option of an IPO, yet preferred private capital because someone knowledgeable would be assigned and available to provide mentorship and advice. There was an opinion that three in five companies would rather just have the money and not the advice, though one participant described a breed of entrepreneurs who are looking for a private equity firm that can help as required, not to give unsolicited advice, but play the part of a sounding board. Entrepreneurs can also be powerful advocates for private equity as distinct from public money or hedge fund money. As Nainesh Jaisingh observed: We have entrepreneurs who go out and talk reasonably publicly of the value that their private equity investors have added in helping them build their companies.

I know there is enough demand, the question is whether the management can actually deliver or not. And to find out you sometimes need to spend time on the shop floor.
Abhay Havaldar, Managing director, General Atlantic

It was pointed out that companies will have different reasons for wanting private capital depending on the type of company and what stage it is at, i.e. growing, seeking acquisitions, family owned, or a large corporate. First generation business builders, for example, gain a considerable sheen of credibility and governance by having private equity on board, which will help when bidding for international contracts and attracting good talent for the company.

Private Equity in India

What makes private equity successful in India?

An aspect of private equity that companies find attractive is that they gain an investment partner who is able and willing to provide continuous advice and support. Here the Indian connection becomes important, since many Indian companies understandably want Indian solutions to Indian problems. Therefore, an investment partner with a team on the ground with expertise and knowledge of the local environment and operational issues is very likely to be preferable to a hedge fund flying in from Singapore and spending three days a month in India. Many companies appreciate being able to have in-depth discussions with their investment partners about a variety of business decisions, for instance advertising investment, merchandising or retailing. It is extremely difficult to have such discussions with someone who spends three days a month in India and then disappears. So what is the significance of a companys Indian origins? One participant made a distinction between large and small companies. For larger companies operating on a national or even a global scale, market forces will override the importance of a companys Indianness. For smaller companies with a strong local presence and still in the process of evolving, regional factors may come into play, and these will rarely be understood by non-Indian private equity firms. The fact is that as Indian companies grow they must learn to play by different rules, accessing global talent pools, capital pools and customers. The more they operate on the world stage, the harder it will be to determine their centre of gravity.

What is an Indian company?

Led by Abhay Havaldar, members of the roundtable spent some time discussing whether the Indianness of a company matters in terms of the kind of capital it is able to attract and the way it will be treated by investors. The consensus was that in an increasingly globalised marketplace it is becoming harder to determine a companys nationality. Indian multinationals increasingly have to adopt a global business approach while maintaining core Indian values. Equally, many multinationals are becoming de facto Indian as a result of the rising percentages of Indians they employ. One investor questioned whether a Where is a companys centre of gravity, after all? Locating it is not always straight-forward. Even if the majority of a companys employees are in India, the lions share of revenues may come from overseas. Almost every export-focused Indian business will company headquartered in the US, with an Indian CEO domiciled in the US and with 8,000 out of its 10,000 employees sitting in India, was an Indian company. Another person asked whether companies not currently considered Indian will end up becoming so on account of having more employees in India than elsewhere.

Understanding market conditions

One participant raised the issue of how private equity firms spend resources on due diligence, in particular what he called labour diligence. His view was that much of the time spent on demand diligence is mostly irrelevant. I know there is enough demand, the question is whether the management can actually deliver or not. And to find out you sometimes need to spend time on the shop floor, maintained Abhay Havaldar. Whereas an Indian-based private equity firm is more likely to understand the particular dynamics affecting an Indian company, US-based firms often mistakenly approach investment opportunities with a belief that a model that works in the US will transpose successfully to India. It can be difficult for them to get the balance right between introducing best practice and discarding what is irrelevant and possibly even damaging for Indian companies. The reality is that business models are converging and there is no longer an Indian way of doing things. Darius Pandole remarked: These days you have got to be globally competitive. Yes, there may be some differences with family-owned businesses that want to retain most of the control for themselves, but even that is changing. Abhay Havaldar explained what he found to be most rewarding, setting aside the question of capital gains: Making the right calls for a business in the sector, enabling the company to move to the next league can be a huge kick to the CV of the fund (or the CV of the individual). But most important is the kind of relationship you will get with a promoter. It is ideal to develop a partnership in which you can assist with future ventures and opportunities. It is mutually beneficial to work with successful serial entrepreneurs.

probably acknowledge that it is headquartered in India because that is where its roots are, even though it might easily choose to set up a manufacturing facility or delivery centre in Europe, China or elsewhere. The nature of modern global business is such that the complexion or footprint of a company could change dramatically, rendering it less (or more) Indian in a short space of time.

Private Equity in India

The value of private equity

The extent to which it is important to be an active investor was the subject of considerable discussion. Companies are looking at the difference between private equity, the public market and hedge funds as potential sources of investment. In the minds of the promoter the jurys out do we really add value or not? asked Abhay Havaldar. In the next couple of years a lot of these things are going to come home to roost; reputations are going to get established or destroyed. Hopefully, people are going to say: you know, these private equity guys were with me and it really works. Ultimately, of course, the private equity business is all about achieving financial returns. Some firms may have aspirations to add value and growth, but that is a means to an end the goal is to make money. Its hard for me to sit here and defend why I should invest in a private company which is one-fifth the size of a public company, at a similar valuation, with presumably a similar outcome in terms of return. What matters is whether my LPs get risk adjusted and generate the return in a competitive market, Puneet Bhatia pointed out. A similar point was made by Nainesh Jaisingh, who was equally clear that the first priority in private equity is to make money: Obviously, your access to information with a private stock is really different from a public stock, but youve got to be able to justify why youre going into a private company when there is an alternative option at a similar evaluation.

The exit strategy

Participants were asked whether they come across investee companies reluctant to proceed with a public offering because the market has zero tolerance and is unforgiving whereas private equity is seen as more forgiving and willing to take a longer-term perspective. It is forgiving but not forgetting! The key issue here is patience, maintained Raj Dugar. Companies cannot escape the underlying assumption on the part of private equity that there has to be an exit strategy: The company realises its getting patient capital, but at some point in the future it wont be independent. Some day it is going to be acquired, or there will be an IPO, added Raj. This can be particularly problematic for family businesses which may be open to the idea of taking capital, but then hesitate when the potential investor raises the inevitably of an exit. Darius Pandole observed: Weve seen some hesitation because in the family theres some faction that says: yes, we think its a good thing, whereas others think: well were not sure if were ready for that; weve been in business for 30 years and weve dealt fine as a private company.

Historically it has been very easy to list in India, felt Abhay Havaldar. We have 5000-plus companies which have no business being public; some of these are virtually private companies, except they happen to be listed. And liquidity offers better valuations and greater financial flexibility, he said. This is borne out by the fact that most of these companies trade their shares once every six months. In such instances, listing and liquidity have very little to do with each other. This question of liquidity is a crucial point of debate with companies considering private equity. The ability to create liquidity is high on the private equity firms agenda, whereas investee companies may be looking to private equity for a variety of different reasons, such as creating a diversified capital base, or simply getting help in funding a change of ownership. We spend a lot of time persuading companies that they need people dedicated to investor relations to educate the market about the company, not just investors in India, but overseas as well. Thats an important part of what we can add to the company. Sure, spreading this understanding has a selfish motive, but it helps the company as well, claimed Nainesh Jaisingh.

Its hard for me to sit here and defend why I should invest in a private company which is one-fifth the size of a public company, at a similar valuation, with presumably a similar outcome in terms of return. What matters is whether my LPs get risk adjusted and generate the return in a competitive market.
Puneet Bhatia, Managing Director, TPG Newbridge
Participants agreed that the bullish nature of the market was bringing in a great deal of new capital, but that there was still a danger of getting carried away. This is a market with a rising tide. Its lifting all boats, but even if your boat has a hole in it the chances are you will be able to attract capital. However, our view continues to be that this situation can change, and besides, we dont need to do 20 deals a year. The question is, can you find those two or three companies a year that understand the proposition of private equity, that know that trying to ride the public market is a dangerous game? This sentiment was shared by all those present. The rising tide is not just happening in India. As one participant observed, similar market dynamics are in play right across Asia, making the bull market a topic of much debate in private equity circles. There is a fine line between capitalising on growing markets and growing businesses and staying disciplined in terms of valuations. If you sit on the sidelines the world

Private Equity in India

could pass you by. There is clearly no easy answer many companies are growing 2030 per cent per annum phenomenal growth by most standards. And, whats more, they have been doing it for a while. Hedge funds acting like private equity firms are not as widespread in India as they are in the US, but they are getting increasingly active. With the rising market, many hedge funds are seizing the chance to act like private equity (without the value added), coming in either just pre-IPO or slightly further back than that, and looking at an early exit opportunity. I think its an opportunistic phenomenon. There is an element of convergence, but over a period of time the differences should come out and hedge funds and private equity houses will revert to their respective positions, predicted Puneet Bhatia. There is a view that in India it can sometimes be harder for a company to raise equity worth US$5 million than to raise US$100 million. At $100m all the big boys are there with their cheques. People are not interested in US$5 million its too small a sum to spend time on. Nevertheless, these smaller deals can give some element of protection in the euphoric climate were in now, commented Raj Dugar.

If you limit your possibilities to people you know and feel comfortable with, youre not necessarily going to get the best talent.
Nainesh Jaisingh, Managing Director, Standard Chartered Private Equity Fund (SCPE)

Improving the quality of boards and managing succession

Tom Neff, who has significant experience with US boards, enquired about the role of private equity in corporate governance in India. As one participant pointed out, there has not been significant pressure on companies to improve the level of director independence, although the regulators have recently addressed this issue through the new Clause 49. The sheer number of listed companies in India, together with those that may be preparing to list in the future, means that a huge pool of board directors is needed if governance standards are to be raised in India and standards of independence improved.

Traditionally, boards of family-owned businesses have consisted almost exclusively of family members and friends. Private equity firms recognise the importance of finding outside directors who can provide the knowledge, expertise and experience necessary to help steer a company through its next stage of growth or towards a public offering. For many companies, the board meeting is purely about compliance and the real debate and decision-making happens outside the meeting. Adjusting to a more rigorous style of board meeting can be extremely difficult for such companies.

Finding leadership talent

For private equity firms, finding good, qualified board directors who can make a significant contribution to an investee company is not the only human capital challenge. Finding executives who can fit into a business that has been controlled by the founder or the family patriarch is equally difficult. The human capital aspect of private equity is critical. Private equity firms often play a strong influencing role in helping companies attract talent, commissioning search activity, and helping promoters to interview and assess talent. In the US, the number of senior corporate executives who are attracted to private equity as an alternative and lucrative career step is remarkable. They are either interested in running a portfolio company or becoming an operating partner, bringing their operating experience to portfolio companies and adding value. The same level of eagerness among corporate executives may not be true of India, but private equity firms need to be putting a great deal of energy into finding the right talent to run the businesses they invest in. If you limit your possibilities to people you know and feel comfortable with, youre not necessarily going to get the best talent, Nainesh Jaisingh pointed out. The patriarch who does not want to leave the company, insisting that he should be succeeded by a family member, will not be aware of the 20 other people who could do the job better. Search firms are increasingly being used to identify candidates who meet the criteria for critical leadership positions, and to conduct rigorous due diligence on them. When an internal succession candidate is being considered, particularly within a family-owned business, external executives can also be put forward against whom the internal candidate can be benchmarked. In the US and in other markets where executive search is widely used by private and public companies alike, the majority of CEO searches involve at least one internal candidate. Executive search firms can be involved in several steps of the succession process without actually doing an external search, including assessing internal candidates and, on behalf of the board, discreetly benchmarking them against potential candidates in the market without ever compromising the confidentiality of the situation.

Private Equity in India

Conclusion
Private equity is developing into a major player in the Indian economy. The presence of private equity teams attuned to the particular requirements of local businesses has contributed to the attractiveness of private equity as an alternative source of capital to the banks. There is a growing perception among promoters that private equity firms can add value on several fronts raising corporate governance standards, providing global connectivity, building executive teams, improving organisational capability, enhancing evaluations and creating liquidity. Indian companies are increasingly global in outlook, whether they are involved in outsourcing activities or seeking new markets for their products or services. It is essential for them to be able to work with private equity teams that not only have a deep knowledge of the local business environment, but also have the relationship orientation, cultural flexibility and global reach that will help them realise their potential and, ultimately, deliver better financial returns.

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The participants
Anjali Bansal, Spencer Stuart, india
Anjali Bansal manages Spencer Stuarts Mumbai office, which serves multinational and Indian companies on critical leadership and board issues. Anjali focuses on world-class leadership development in India. Prior to joining Spencer Stuart, Anjali was a consultant with another global executive search firm, working with private equity and venture capital firms and conducting search assignments for clients in the financial services, industrial and technology sectors. Previously, Anjali was with McKinsey & Company, where she focused on strategy consulting assignments with financial services firms in banking, capital markets, insurance and private equity.

Puneet Bhatia, Managing Director, TPG Newbridge

Prior to joining Newbridge in April 2002, Puneet Bhatia was chief executive, Private Equity Group for GE Capital India, where he was responsible for conceptualising and creating its direct and strategic private equity investment group. He created and handled a portfolio aggregating in investments of over $100 million and was also responsible for consummating some of GE Capitals joint ventures in India. Prior to this, Mr. Bhatia was with ICICI Ltd from 1990 to 1995 in the Project and Corporate Finance group and worked as senior analyst with Crosby Securities from 1995 to 1996. He has led two transactions in India with Matrix Laboratories and Shriram Transport Finance and currently serves on the board of directors of these two companies.

Raj Dugar, Senior Managing Director, Fidelity Fund Management Pvt. Ltd.
Prior to Fidelity, Raj Dugar was the director with the buyout team of Carlyle India Advisors Private Limited. Earlier, he was the director at Merlion India Fund, a PE fund sponsored by Standard Chartered and Temasek. He was also the founding managing director of West Bridge Capital Partners and prior to Westbridge, was an investment banker at Goldman Sachs in Hong Kong and a management consultant with Booz Allen Hamilton in USA and India. He holds an MBA from MITs Sloan School of Business.

Abhay Havaldar, Managing Director, General Atlantic

Having established General Atlantics India office in 2002, Abhay Havaldar presently leads General Atlantics South East Asia investment initiatives with a focus on Financial Services and Enterprise Solutions. Earlier, he co-founded Connect Capital, the Asian vehicle for Insight Capital Partners and before that was a partner at Draper International, establishing it as Indias pioneering early stage technology venture capital firm. Prior to Draper, he spent twelve years in both the hardware and software industries in USA, Europe and Asia. He is a renowned name in the financial community having a deep understanding of Indian markets.

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Private Equity in India

Nainesh Jaisingh, Managing Director, Standard Chartered Private Equity Fund (SCPE)
Nainesh Jaisingh worked with the global equity investment arm of Standard Chartered at Singapore since 2000, making and managing successful investments in a variety of sectors including Technology, Pharmaceuticals, BPO and Engineering. He relocated to Mumbai during late 2005, to set up an expanded presence and larger team for SCPE in India. Prior to 2000, he spent about 9 years in ANZ Investment Bank and ANZ Grindlays. He holds a Bachelors degree in engineering and an MBA from the Indian Institute of Management, Bangalore.

Tom Neff, Spencer Stuart, U.S.

Chairman of Spencer Stuart US, Tom Neff is based in New York and has been with the firm since 1976. He managed the worldwide firm from 1979 to 1987. His consulting practice focuses on CEO and board of director consulting and searches. He has conducted more than 150 CEO and more than 350 board searches. Prior to joining Spencer Stuart, he was a principal with Booz Allen & Hamilton in executive search, the CEO of an information systems company and held a senior marketing position with TWA. Earlier, he was a management consultant with McKinsey & Company in New York and Australia.

Darius Pandole, Partner, New Silk Route Advisors Pvt. Ltd.

Darius Pandole has been a partner at New Silk Route Advisors Pvt. Ltd. since its inception in February 2006, and manages the firms private equity investment operations. An early entrant in the Indian private equity industry, he has over 12 years of equity investing experience. In 1997, he joined the investment team at the IndOcean Fund (established by Chase Capital Partners and Soros Fund Management), amongst the first private equity funds to be established in India. In February 1999, he co-founded and served as managing director of IndAsia Fund Advisors Pvt. Ltd. He joined IDFC PE Ltd. in February 2003, and was the executive director, and later chief operating officer of this asset management company that managed the India Development Fund, an infrastructure focused private equity fund. He has a BA (Economics) from Harvard and an MBA from the University of Chicago.

Malini Vaidya, Spencer Stuart, Singapore

Malini Vaidya leads Spencer Stuarts Consumer Goods & Services Practice in Southeast Asia and also works with financial services clients in the region. Previously, Malini was a principal in the Singapore-Kuala Lumpur offices of another international executive search firm, advising clients across Asia in a diverse group of industries and working with clients on board director appointments and senior executive management assessments. Before moving to Singapore in 2001, she served as the India head of business development for cash management services in the corporate financial services group of ANZ Grindlays Bank.

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Private Equity in India

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