Mumbai: Henry R. Kravis, co-founder of one of the world’s largest private equity (PE) firms, Kohlberg Kravis Roberts and Co. LP (KKR), comes to India at least thrice a year. This time around, he’s celebrating his 67th birthday in Mumbai amid 31 meetings with policymakers, government officials and family-owned companies across the nation.
KKR, which has deployed around $1 billion (Rs4,530 crore) in five deals in India, now plans to position itself as a multi-asset solutions provider in India, much like its model in the US, where it is listed and provides an alternative asset platform.
Apart from PE, this platform includes infrastructure and oil and gas financing, asset management, proprietary trading, mezzanine debt and a capital market business.
“Don’t think of KKR as just a PE firm,” said Kravis in conversation with Mumbai’s business press on Thursday. “We are in the first innings of a baseball game in KKR. I am having more fun today than we have had in a long time, because we are building something exciting.”
In the past 35 years, KKR has invested $400 billion across 175 transactions, which include Indian investments such as $250 million in Bharti Infratel Ltd, $900 million in Aricent Inc., $167.37 million in Dalmia Cement (Bharat) Ltd, and $75 million in Coffee Day Holdings.
While KKR has tweaked its global model of making buyouts to minority stake growth transactions in India, it will now also look at investing in listed companies in the country. It may eventually raise an India-focused fund, similar to the $1 billion China fund it’s raising. There’s no plan for an India fund right now.
KKR currently has a $4 billion pan-Asian fund that makes investments in Greater China, Japan, Australia and India.
Missing potential: KKR co-founder Henry R. Kravis says India has a well-functioning equity market, but the corporate debt market in the country is practically non-existent. Peter Foley / Bloomberg
During his press conference, Kravis spoke on the challenges of investing in India, KKR’s India strategy, how the approach of limited partners (who invest in PE funds) to funds has changed, and succession plan at KKR. Edited excerpts:
On challenges in India
You do not have in this country a deep or broad capital market. There is a well-functioning equity market, but the corporate debt market is practically non-existent. Last year the corporate debt market must have done half a billion dollars of financing, which is nothing... It is zero.
There is a reasonable debt market for the public sector so you have to develop a reasonable, a broader and deeper capital market that covers debt and equity markets as well.
I don’t know any country which can grow without a burgeoning, a deepening and a broader capital market.
One of the ways you can get there is that you have to open up your insurance market. So you are not stopped at 26% ownership by foreigners; open up your bank market so that you are not stopped at 49% ownership by foreigners; and some of the other markets have to open up.
Regulations need to be relaxed to make it easier for companies to get more capital. More capital means more opportunities for growth. This means refinancing can take place in companies and gives them the opportunity to go international.
On India strategy
We will do minority investments in India. There is not a lot to buy in India. We bought one company (Aricent) in India and that was a fluke that we were able to buy it as it was owned by an American company.
But family-owned companies are not for sale and why should they necessarily be? What they do need is a partnership approach to improving their business.
What we can bring to them is all the resources we have within KKR.
Picking the partner and making sure we are on the same page is critical.
We want to make sure that we are dreaming the same thoughts.
We don’t have a target to invest. For good growth opportunities or if any buyouts happen, we have enough money for that. Today, if you really believe that India is going to grow the way we expect and, in any sector there is a massive runway ahead of us, I think we need a lot of debt and equity capital, and that way we will see a lot of opportunity coming along.
We are far more multi-asseted in India today rather than others. It’s more like the US model, where we are able to give debt, equity and mezzanine solutions to our clients.
We are going to be a solutions provider to them and are going to create pools of capital, and if that pool of capital in the long run means another pool of capital (raising an India-dedicated fund), then we will probably have it in the future. There is no plan for it at all right now.
On small Indian deals
We are doing small deals, which are not the traditional sweet spot of KKR. India is a very important part of our future. We are going to have dedicated people in our operating and consulting group that will be on the ground in India and working with the Indian companies.
Don’t forget everything takes time to build out. Don’t compare India to what we have in the developed world. It took a long time.
Earlier, when we started, we would buy a company in the US for $25 million or $75 million, and then, before you know, it was for $30-45 billion. So we ran the full gamut.
A big part of what we do today is in the $1-5 billion buying of companies, and capital markets raising could be $25-400 million, which we will do here over time.
We have the capability and we will do a build up. Other opportunities will come when Indian companies look at deconsolidation and M&As (mergers and acquisitions) when they are stepping overseas.
On public market deals
There is not a week that goes by that we are not looking at a company. But we are not going to make those many investments. India and China are growth portfolio investments. We are open to everything including investing public market companies. So, I won’t rule out anything. We can get certain rights depending on what security we offer them, whether it’s a structured debt security or a preferred stock as long as it’s different than pure public stock.
On limited partners, fundraising
Capital today in the institutional field has shifted from the way it was years ago. Today, these institutions have limited capital because of lots of different reasons—primarily, the pension funds in North America and Europe. For sovereign wealth funds, there is newfound wealth, and some of them think they can do PE themselves and don’t find the need to invest in the PE funds.
But terms are more stringent than before. We feel it and we see it when we go out and talk to investors.
Large part of it really comes down to transparency more than anything else. A lot of firms were not really transparent with their LP (limited partner). If everything is going fine and there is money coming back and returns are great, then life goes on and it’s not that important. But when things turn bad as they did in 2007, 2008 and 2009, then that’s when the transparency issue came up.
So, a lot of what happened was trying to force transparency, and nothing is wrong with that. They are trying to force real alignment of interest between LPs and GPs (general partners).
It’s harder to raise money today than what it was, and funds will be smaller. There is a lot of dry powder and equity waiting to be invested, and the debt markets are recovering and opening up.
On state of pension funds
Pension funds in America today are really underfunded—the state funds in particular. I don’t know where some of these state funds are going to get funding because it comes from the state, and they have these benchmarks when they run the annuities.
They say this is the population we have and is recovering and we have to earn 8%. I don’t know of any funds or institutions that are earning 8%. This will become an issue.
Today they push it under the rug and play accounting games, but they are really underfunded. So what are they doing? Some of them, and unwisely that too, are taking a bigger percent of the portfolio into alternative investments like hedge funds and PE.
Hedge funds are probably coming back fast and giving them returns though they were severely hit last year.
On KKR’s succession plan
I am working harder today than I have ever worked. I will have 31 meetings by the end of this week, and when I leave here, I have the same number of meetings in the Middle East. We are in the first innings of a baseball game in KKR.
I am having more fun today than we have had in a long time because we are building something exciting. But we have a succession plan in place. We have a management committee set up eight or 10 years ago and has the next generation leadership— people who have been in the firm for a long time and are running different parts of it.
We have the head of Asia on it, the head of Europe on it, we have the head of our capital markets, head of overseas capital market, head of asset management, two heads who run the US private equity division.
We have a very deep bench, and any number of people could run the firm when we are ready to step down.
Having said that, it’s really up to our board of directors and it’s the real duty of the board of public directors to have succession and strategy. We talk to them about it.
We have a team on the road right now talking to investors, and that’s by design. We want to make sure that the investors who are buying our stock or potentially buying our stock or the analysts who write about it see that there is potential depth to it.
George (George R. Roberts, his first cousin and co-founder of KKR) and I are not on quarterly calls, and that’s by design. Also, when the team goes on road shows—except if it’s a big road show, then George and I may speak—it’s the other guys like our CFO (chief financial officer) or head of asset management business (who speak).