Advent can deploy $1.7 bn in India in 3-5 years: Chairman
Overall, India has been increasingly a more attractive environment for investments.
How has the overall PE landscape changed in India in the last 10 years?
David Mussafer (DM): We have experienced improved reforms of late and more advantageous tax rates for business but the important changes that we have seen has actually been the increase in the number of $100 million plus transactions that we are typically target. Additionally, we see an improvement in the exit market in terms of secondaries and strategic sales at the end of our investment period.
James Brocklebank (JB): We are also seeing an increasing number of control type transactions as well. We have also invested in people, relationships that has helped us with domain knowledge here and gain comfort and credibility locally.
Global CEOs keep complaining about the lack of regulatory stability in India. As financial investors, do you worry about that too?
DM: I don’t think we are thinking that there are such fast changing developments in the country that are making it impossible for us to invest. I think there's always going to be certain executives who would like to push the government for more relaxed regulations. But overall, India have been increasingly a more attractive environment for investments and I think that has reflected in the fact that we’ve made more than $875million in the last 6 months here in India across a range of different investment opportunities.
India is facing severe slowdown. Do you see this as a temporary phenomenon or more long term and structural?
DM: One of the things that really differentiates us in private equity is that we have the ability and luxury to think in longer economic terms unlike public market investors who are thinking next 3 to 6 months. We are thinking about the next 5 to 6 years. The challenge for us is to consider if the business that we have just purchased is going to be better positioned after our ownership period 5 or 6 years from now? In that context we do think about possible dislocations and disruptive technologies and things that could change the landscape. We certainly believe India broadly is an attractive market place or else we wouldn’t be investing actively in the way that we are today
We don’t see our investments as just capital, but it is capital along with engagement and better governance to drive alpha,
JB: In other words, the micro is very important along with the macro environment. The specific company where we are investing, the individual opportunity where we can add value. That is of a greater concern.
But several of your investments are in the consumer discretionary space. The ongoing slowdown has hit consumption badly. How are you coping?
JB: I think each investment is only underwritten on its own basis. But if I think about the things we’ve been doing in the consumer and financial services, we think that they present interesting opportunities to grow notwithstanding the current onslaught. I think we would always back these categories of opportunities and sometimes slowdown, correction in market valuations, etc., can actually be the perfect entry point for us and you have seen us take these opportunities.
DM: If you look back across our global funds, some of our best funds and best investments have been at times of economic distress. For example, our 2008 fund is one of our very best funds and it was invested during that time period which saw significant turmoil till about 2010. As I said, our business is for the long term as opposed to the economic headwinds that we might be facing in the near term.
You have deployed over $2 billion so far in India of which $875 million in last 12 months. How does that stack up against other large EMs?
JB: It’s more than what we have invested in China but we also have a separate Latin American business which is quite active. We have our biggest program in that region. But we don’t have a specific allocation to regions we deploy the capital where we think the opportunities are best. Just so happens that actually we think that in India the opportunities have been very strong recently.
You have a wide sector focus too…?
JB: Consumer, healthcare, financial services, Tech Services and selectively industrials are the 4 key sectors that we are have been underwriting. We have 9 companies here, of which 2 are in financial services, 3 in consumer, 1 in healthcare, 1 in Engineering Services and 1 in industrials.
But the sudden spate of deals has caught everyone by surprise. What has changed on ground?
DM: I think it’s reflective of our cumulative experience. We built our teams slowly as typically when we go into a market we try to build from within. Additionally, we have been building the network of our CEOs, operating partners and advisors. What we are seeing today are the fruits of some of that work which has going on since before. Lastly our business is a lumpy business.
Are you focusing more on buyouts or control transactions as well?
DM: We try to take somewhat of an agnostic approach when we think about a great investment idea. Sometimes that is the only thing available. If someone has an amazing business, they might not want to sell all of it and we are also happy to partner. At other times there is a natural reason why a controlling stake becomes available. We certainly always appreciate those situations because we are thinking about what we can do to influence the future performance of the company. And obviously where we have control, we don’t have to spend much time thinking about the governance in order to affect change. In minority positions we are also working in trying to help our companies in many cases but there is more work that needs to be done. often times to build alignment with the other shareholders and through the governance provisions that you have to work through in order to make those influences.
JB: We are typically an engaged investor so we like to work with our companies and the management teams and in that context control deals work well for us. But we certainly do look at other types of structure particularly where there is a kind of a mutual understanding about what can be achieved together.
Of late we hear a lot about trust deficit towards Indian management and boards, especially in areas like financial services. What has been your experience with them?
DM: We go into our deals working with some very experienced advisors or operating partners. Often they have some kind of engagement with the company or their board. So we have not had any concerns about that.
JB: One of the things that we as PE investors can do is create alignment. It’s really powerful. So having the ability to have the capital, ownership aligned with the board of directors and the management of a company is really powerful.
Are Indian entrepreneurs really receptive to the fact that you are not just a capital source but an engaged, affirmative investor?
JB: It is certainly what we see. So we see more receptivity towards the work we’re doing. We certainly see excitement with the teams that we are working with. And there is a broader and deeper pool of capital that is available for India from ourselves and our peers. And all this is good for the development of the market. It’s natural to have trust deficits and concerns in certain sectors when there are shocks or issues that occur. But I believe the fundamental work that we do, really creates confidence with the companies that we invest in, and so I think that we’ve seen that grow and improve over the last decade here in India.
Is there some sort of estimate how much you could invest in India over the next 3 years to 5 years?
DM: We have a $17.5 billion dollar global fund. We don’t have a target as to how much we should deploy but we could easily deploy up to 10% of the fund here. So given the right opportunity we could do as much as $1.7 billion. But I reiterate it’s not a sacrosanct figure.
And over what sort of approximate time frame?
JB: The fund life cycle is for 10 years. But typically, the active investment period is 4 to 6 years.
What about Indian valuations? Most will complain that it’s very rich.
DM: Growth comes at a premium. And India is the very definition of growth. You have one of the highest GDPs in the industrialised world and Indian companies historically have very attractive growth rates given long term positive trends. The key prices are high for assets all over the world as interest rates remain low. Low rates are an asset inflator. So typically high prices are a healthy sign for an economy. And that is no different in India which has some of the highest prices. We have to find opportunities where we believe we can even help accelerate those growth rates even more or improve their cost structure, ability to source globally or finding other ways to really help a company. And what we found is that after we take a good company and build it into a great one, the valuation tends to remain or even improve further. So if you are investing in India you’ve got to have a stomach for these high valuations.
Would you look at buyouts if the target is listed and be flexible about minority investments in private companies. Do you approach deals from such a prism?
DM: We always prefer control where we have the opportunity. But there is no single formula. People know that we have done some of the most creative structured transactions all over the world and some of these are really complex. In the United States one of the best deals we have ever done is buying 15% of the public company called Lululemon. So it’s purely opportunistic.
You have a subsidiary Stanley House Capital for public market investments. Is this a good time for them to enter India and expand?
DM: Sunley House has already invested in 3 companies in India via FDI/FPI route. We have a really unique structure in Advent as unlike most of our peers with similar public market funds we do not operate within Chinese walls as our peers do. That requires a higher level of coordination to maintain the rules and regulations that allow us to do that. But it gives us the capability to share information going both ways. And that ability gives us insights that are really important in the Indian marketplace from our team here that is shared with our public market’s team. And we have individuals in London and Boston who are actively working on public investment ideas here in the Indian market. And so when those public markets adjust, we do have a vehicle that’s available to take advantage.
In India structured credit, special situations, distressed debt are becoming key business verticals for many of your peers as traditional lending route is drying up. Many have diversified and have NBFC or credit divisions or JV. Advent is yet to branch out. Why?
JB: If you look at our history over the last 15-20 years, we have actually spent a lot of time focusing our efforts. And many of our peers have spent that same time diversifying. It’s paid big dividends for us and we don’t have any plans to really lean in and change. For the most part, while certain markets do become more difficult or complicated to finance, what we found is that we generally have access to all the capital we need to make the type of investments we want to do. If we found that there was a real dearth of capital that inhibited us from making investments in an important market like India, we’d certainly consider raising a supplementary fund to support that. But at the present time we don’t see the need to do that.-
Emerging cos, tech based startups, internet and social commerce companies and unicorns are grabbing the headlines in India. Even non-VC investors are looking to dabble in them. Are you worried about valuation bubbles that is making you stay away from them still?
JB: Technology is critically important. So let’s make sure that we don’t conflate the idea that we don’t like technology focused investments. But when you think about large cash consumptive consumer business models, we have certainly been more wary about leaning into some of those. And it’s not just here in India, but globally. We’ve kept a keen eye on a lot of these types of business models. In fact, we’ve kept an eye and seen Walmart’s acquisition of Flipkart . We actually teamed up with Walmart in Brazil to buy their business there. And so we are well aware of some of the big successes as well as some of the businesses that have been more challenging. We see the consumer evolution and change continuing. So it isn’t that you are going to see continued disruption. We are very picky and selective when it comes to choosing those types of investment ideas. Aside our $17.5 billion fund, we have also raised a $2 billion tech fund this year, opened an office in Palo Alto. This gives us significant strength and sort of opportunity within the technology sector. So having that west coast lens is really important for the future we think.
So you are saying you will only deploy capital once you see a clear path to profitability and not fund losses for the sake of market share and future growth?
DM: I think it is the visibility for a cash flow positive business model. We certainly have invested in businesses which have been losing money when we stepped in. We have also invested in technology companies. But we don’t take a portfolio approach of making 10 investments in the hope that one is a big success. When we invest, we expect each and every one of our investments to meet or exceed our underwriting criteria. And we have done that in more than 90% of the investments. We also have on boarded a new operating partner on the West Coast by the name of Jon McNeill who was the President of Tesla. So we have some talent that’s been involved with some of these new tech businesses too. But as James shared, we are investing to get a good grasp of the new underlying trends are that are creating some of those disruptions in the market worldwide.
Are you actively pursuing any Indian start-ups?
JB: We have looked at some in the payment space. More recently we have looked at some software businesses. But we really don’t target startups per se.
DM: We believe we will find some earlier stage business models that are still in a growth mode but it's not the principal target of our investment activities.
Payments has been one of your focus areas of late with big bets in Italy, US. How do you see that space evolve in India especially with the government targeting the cash economy?
JB: Payments remains extremely interesting area globally. You know, it's become a very strategic sector because it basically helps merchants get paid. And there's a lot that a payment company can do to facilitate. In India, we've looked at a number of interesting local payment businesses but as yet we haven't actually acquired one. But it's something that we continue to look.
You've just closed a pharma transaction this week. Indian pharma companies are battling both regulatory as well as pricing pressures. You continue to remain bullish. Why?
DM: Bharat Serum has a very interesting growth opportunity, particularly in the women's health area.
JB: Our hope is that we'll be able to continue to invest and further develop and focus their R&D efforts. So that's one of the things when we've been able to do successfully with some of our other pharma deals around the rest of the world. And so, hopefully, those efforts will continue to build the portfolio, add credibility to their business model, and ultimately create value for us as a shareholder. We've probably invested in more than a half a dozen pharma deals all over the world and in many cases, it's about creating focus around the R&D pipeline and building great talent to help execute that.
You talked about the recent hire from Tesla. Renewable energy along with the larger eco system of clean energy is also a key focus for our Prime Minister. Are you keen to explore this space. Any pockets I particular like driverless cars, battery storage etc?
JB: It could be that we will find interesting ones that are going to be able to benefit from these broader trends like EV. It's certainly something that we are looking at all over the world, as well. We're looking with some caution at traditional businesses that might be displaced by EV. So we're always thinking about what are the disruptive factors so if it was a traditional automotive parts, business, obviously, that might have some challenges going forward in an EV dominated universe. We have a business in the United States that provide software for collision repair centers. And we're obviously thinking about what lies down the road, in an environment with autonomous driving vehicles. And so we try to keep our finger on the pulse, and remain knowledgeable. One of our bigger investments is a water company. And globally, water is going to continue to be a really important factor. And so we're investing globally in building this company. And so whether it's renewables, EVs, water more broadly, we would love to find great investment ideas that align with the future of making the planet a healthier, better place to live.
Despite having a broad sectoral approach is there a no go for Advent in India?
DM: I think that we try to really create expertise that we can tap globally. And so a no-no is going to be some place that we really don't have the domain expertise. It only takes two horses for a horse race. And PE is a winner take all business, which means in order to succeed in winning an asset, you've got to be really knowledgeable and prepared to pay that little bit extra to be the winner. There are certain areas like real estate where many of our peers are very active and is among the largest area of investment. There is nothing wrong with real estate. We simply don't have it as our mandate.
For a buyout fund, isn’t it very hard to take a company private in India or raising leverage on shore. Aren’t they major handicaps?
DM: It's never easy to take a company private. Every market has very specific rules and regulations around public shareholders. So I don't think India is alone in that challenge. Most markets, obviously want to make sure that you protect the public shareholders. And in doing so, often it creates a more complicated path to do a public to private. In terms of the financing related issues, you know, those ultimately get factored into the price.
This is also the boom time in terms of PE fundraising. You yourself have raised almost $20 billion across 2 funds this year. Are we looking at a problem of plenty with so much of fire power. Could it impact performance of funds as an asset class?
DM: You've always got to have some realization that you've got to be careful, as you're thinking about deploying capital. We never think that it is ever some beginning of a party but it also has never felt like a good time to invest. The best time to invest turned out to be at the downturn in 2009. But then you were staring into the abyss and it didn’t feel like a good time either. Capital will always flow to areas that provide the best returns. Yes, it does make competitive levels higher and things more difficult.
The flexibility that we have in terms of capital allocation and time horizons is a big plus. We run with a global mandate. This is our fourth $10 billion plus size fund. So we've been investing at scale for quite a long time, and I think most of our peers, a lot of them have been through this downturn that occurred back in the ’08 to 2010 timeframe. And even with the capital that exists today are showing quite a bit of restraint, as well as knowledge of the history and so we recognize that there are higher prices and more capital, but that also I think, as an industry, we've grown wiser from the experiences of the past.
JB: I think that we're very optimistic about the future of progress because essentially, PE is fundamentally about a more effective governance model. We don’t see our investments as just capital, but it is capital along with engagement and better governance to drive alpha, and there’s always going to be companies that could benefit from this.
Your last four global private equity funds have produced a net internal rate of return of 23%, as against 11% return investors would have received putting their money in the S&P 500 Index over the same time period. Where does India fall in this? Do you think in a market like ours, we need to recalibrate the returns expectations?
DM: We are not going to be able to comment on specific returns from just a regulatory standpoint. When we think about returns, we're using our global underwriting standards and we don't change those for India or for any other market. So we wouldn't invest here unless we thought we could meet or exceed our global underwriting criteria.