The firm’s investments span markets from China to Australia. How does the opportunity in India compare?

India is an important area of interest for the firm. The long-term prospects continue to attract us: its demographics, the young population, well-respected rule of law, and the short- and long-term economic growth outlook.
The government has done a good job on fiscal consolidation. Rolling out the Goods and Services Tax – which has been in the works for years – and the re-emphasis on infrastructure and associated infrastructure spending provides impetus for growth.
New legislation, such as the Bankruptcy Code, has been positive. There’s been further liberalisation of foreign direct investment rules over the past few years, and clarifying the tax position on capital gains increases confidence and encourages investment inflows.
We therefore see a great opportunity to continue investing in the country. In fact the firm has recently established a credit business, which is currently exclusively focused on India.

Have any of the government’s reforms directly affected your port-folio companies?

Demonetisation took us by surprise. We were right in the middle of that. We own a cash logistics business called CMS, which is the market leader, and therefore plays a key role in keeping cash circulating between banks, ATMs, retailers and individuals. For the first two months [after the government’s November announcement that some bank notes were no longer valid] volumes shrank by 60-70 percent as the banks simply did not have adequate cash available to be put in the ATMs. But they very quickly recovered to pre-demonetisation levels, so in the end there was only a minimal impact.

Did demonetisation affect dealflow?
Dealflow is generally strong in India, but it has been slow over the last three or four months which coincided with the demonetisation period. That’s to be expected when there is so much uncertainty around a big event like that. In the last few weeks though, dealflow has really increased and we’ve got quite a few things that are interesting and keeping us busy. We are trying to decide which ones to prioritise.
As a firm we don’t have a hard allocation to geography and are sector-agnostic, but within each country there are certain sectors which we find more attractive. In India, we look at financial services, healthcare (mainly delivery) and life sciences, technology and business services, including IT and business process outsourcing, and consumer. Consumer tends to be more expensive and it’s harder for us to come by large-scale opportunities in India. Our sweet spot is typically between $150 million and $250 million of equity. We also see very attractive opportunities in pharma, IT-BPO and financial services.

These are extremely competitive sectors — how do you differentiate yourself?
When it comes to a deal, we will have done 80 percent of our work upfront. It gives the seller more comfort. We go to the owner with very high conviction that we have a plan on how to grow their business, and that we have the desire and resources to get the deal done.
In the case of Hexaware Technologies – a mid-market IT services business in India – I’d known the company for 10 years and had done a lot of due diligence over that time. After doing that background work, from the first meeting with the owner to signing the deal, it took six weeks. I’m not sure many firms can work that quickly. We acquired 72 percent, investing over $500 million including an innovative financing solution that was pioneering for a market like India.
We recently acquired 35 percent of a business process outsourcing (BPO) business in the Philippines called Telus International. It’s a corporate partnership with a large Canadian telco and they retain the remainder of the equity. I have spent about 20 years of my career in IT and BPO and worked with the South-East Asia team on the deal. We had been tracking the BPO industry for some time, have relevant experience in the outsourcing space with Hexaware, and our real estate fund had made two investments in the Philippines related to outsourcing. Telus therefore felt extremely comfortable with us in terms of our understanding of the sector and ability to work together.

Is that type of cross-border interaction within the firm typical?
We often call on colleagues in other markets that have done similar investments for their knowledge and best practice, or to help companies that want to expand into new geographies. For portfolio company expansion within Asia, we are probably one of the few platforms that are truly integrated across offices and now have more than 140 people working across eight Asian offices.
The India team also supports portfolio companies looking to enter the local market. With [Hong Kong-based trust and fund administration provider] Vistra, we’ve been very active helping them with a number of acquisitions and have closed two. India was a blank space for them.

How do you approach value creation?
Across Asia the firm’s strategy is to invest into both control and minority partnership investments, but for private equity in India we are primarily focused on controlling stakes or buyouts. We believe that’s the best way for us to us to carry out our value creation plans and ultimately exit our investment. We do also remain open to selectively partnering as a minority alongside leading corporates.
The first thing we do is a deep organisational assessment along with the chief executive to see where we need to add or upgrade talent, and where we might need to change the organisational structure. We do a lot of work around HR as good management is critical to the success of our investments. We spend a lot of time creating and aligning incentives with management teams. When incentives are aligned it’s a lot easier to effect change.
We got very close to investing in an Indian company recently, one which we had high conviction in its potential for success, but walked away because we couldn’t get our preferred CEO in place from day one. That’s a dealbreaker for us.
We also support the company in both organic and inorganic growth, accessing new markets, improving sourcing, etc. We have one of the largest dedicated operating teams in the region.

Is M&A critical?
It depends. M&A isn’t always accretive and can sometimes cause disruption to the core business if not managed well. With Hexaware, we’ve been owners for three-and-a-half years but haven’t concluded any M&A. We’ve been growing the business organically at about 15 percent per year. Similarly we’ve been very selective and disciplined about the M&A opportunities we’ve pursued for CMS, but are evaluating interesting acquisition opportunities for CMS as we speak. With some companies in the portfolio there has been a lot of M&A – Vistra has completed over 30 acquisitions in the last three years.

How long do you typically hold an investment for?
Across our portfolio, our target holding period is three to five years. It’s been different in India, not by choice, but by vintage. Investments made pre-global financial crisis have been slightly longer holds. Having said that, the average will end up being five and a half years. With cement company Lafarge India, we exited in two years because the opportunity was right. We sold our shares back to the parent company when it merged with Holcim.
In control deals, our preference is to find a long term home for our businesses, typically a trade sale. We exited brokerage firm Sharekhan to BNP Paribas last year. We’re really thrilled that management found a good place. In minority deals, it’s typically an IPO.

How strong is LP interest in India?
They invest because of our pan-Asia exposure, but some of our LPs are very keen to co-invest in India. That’s rising. The pan-Asia funds of funds are also returning. Two or three years ago we had very few LPs visiting the Mumbai office and now we host them every other week.

What innovations are you seeing?
We’re constantly innovating to stay ahead of the curve in a market like India. We have been at the forefront of creating progressive financing solutions for our companies, including selective use of leverage given the constraints in the market. A Hexaware bond issuance that we led last year was very well received by the market and collected a number of awards. We have also been innovative on management incentives, approach to deal sourcing and value creation, utilising the resources and experience across the firm.