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India attractive in itself, not just as alternative to China: PAG Boss

In India, the focus will be on export-dependent sectors like pharma and outsourcing as much as private consumption themes around financial services, retail, food and beverages and healthcare.

, ET Bureau|
Last Updated: Jan 22, 2020, 09.12 AM IST
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We don’t invest in India as an alternative to the Chinese market. In itself, it is a very attractive market,” he said.
Hong Kong-based private equity group Pacific Alliance Group (PAG) is looking to invest upwards of a billion dollars in India over the next three years to buy out targets, provide growth equity and even structured finance with an eye to fix broken balance sheets of India Inc.

“We have been following the economic situation in India for the past 20 years… But the macro-economic conditions are much more improved now. The growth rate has slowed down but is still steady,” said Weijian Shan, chairman and CEO of the buyout group that has invested over $50 billion across Asian PE and real estate while justifying its local debut in 2019, almost a decade after raising its first fund. “Double digit interest rates and inflation have been brought down to more reasonable levels and the currency has stabilised. Hopefully it will come down even further and all this is good news for foreign investors like us. We are looking to invest a sixth of our $6-billion Asian fund in India over the next three years.”

From being packed off as a “radicalised” teenager to Mongolia’s Gobi Desert at the peak of Mao Tse Tung’s Cultural Revolution to march alongside the infamous Red Guards and learn about “life” from the peasants to reaching the pinnacle of capitalism as JP Morgan’s go to guy in China, the life of Weijian Shan, one of Asia’s most connected and successful financier is nothing short of an epic movie.

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It is also a saga of two extremes. Of the famed China model of development and the liberal democracies of the West. From volunteering as a “barefoot doctor” in Inner Mongolia to “escaping” to study economics in Berkeley under Deng Xiaoping’s exchange programme in 1980s to being guided by future Federal Reserve chair Janet Yellen and learning “all the math by himself, by candlelight,” only to later become a professor at the Wharton School, followed by successful stints in Newbridge and TPG and then steering PAG, it’s been quite a journey for Shan.

In India, the focus will be on export dependent sectors like pharma and outsourcing as much as private consumption themes around financial services, retail, food and beverages and healthcare. Despite a global mandate, PAG so far has focussed predominantly in Greater China and Japan but India’s 1 billion plus, young demographics is the next big frontier. “We don’t invest in India as an alternative to the Chinese market. In itself, it is a very attractive market,” he said.

Yet valuations – both private and public – remain expensive, feels Shan. “Globally, no bank commands more than 1-2 times its book value. But Indian banks trade at 5-6 times. That’s commonplace. And these valuations have sustained over a period because of the limited opportunities on the supply side.”

Explaining this trend, his professorial spirit comes out in the open. “The Indian investors are not allowed to invest in other markets and hence the domestic investors have no option but to play locally,” he adds.

Pushing the case for controlled deals, Shan, quotes the famous political economist Francis Fukuyama who said that largely Asian societies barring Japan (i.e. China, India and South East Asia) are low trust societies and to be able to find a partner (promoter) to trust and invest in is difficult. “Reputation, experience and track record (of the company and the promoter) becomes very important. And hence, we prefer buyouts because we like taking control of the companies we invest in.”

Sensing an opportunity as domestic corporates grapple for funds, Shan calls the current bad loan situation cathartic “health check” to the banking system. “High growth rate does not necessarily mean quality growth and if the growth is primarily driven by credit expansion then it is not going to be sustainable. And very often it takes some kind of financial crisis to get the economy back on track. So, some correction is perhaps good for long-term sustainable growth of the economy and if you look out for problems that India has today, it has lot to do because of the over expansion of the shadow banking system.”

Hailing former RBI governor Raghuram Rajan’s belt tightening measures as prudent, Shan argues: “The tightening of the monetary policy may not be liked by many people even today but from our view, for the long-term health of the economy, it was actually necessary.”

However, he emphasises on the need for financial, regulatory stability as much as political and social cohesion, especially in a polarised world of trade wars between superpowers like China and US. “I do not think the stalemate is likely to get over soon. The high tariffs are here to stay for some time.”

“From the US perspective, the talk is about the Chinese government’s support of certain businesses, specifically the state-owned sector. If China can further reform the state-owned sector to downsize and privatise it, my feeling is it is good for Chinese economy. America wants China to move in that direction”.
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