Mumbai: The 25-year old global private equity firm with $26 billion (Rs1.17 trillion) under management Advent International Corp., set up its India office last year. This is Advent’s second office in Asia after Japan. Managing director Georg Stratenwerth preferred to move to India for two years along with a few colleagues rather than calling the shots from the London headquarters. Stratenwerth spoke about Advent’s plan for India in an interview.Edited excerpts:
What has been your experience like in the first few years—making your first investment in 2007 and setting up an office last year?
It has been a three to four-year journey. We have offices in 16 countries. The way we do it is that we have very strong sector specialization like financial services and healthcare and these teams proactively source transactions. They go out meet companies, entrepreneurs, promoters, management teams and prepare transactions. The investment we made in CAMS (Computer Age Management Services), which is a mutual funds back office processing unit in Chennai was an example of that. The TMT (telecommunications, media and technology) team identified this company, met the promoter over a period of two years, and that led up to the investment in 2007. Making an investment was an important landmark and since then we have been very systematically looking at the Indian opportunity.
Slow and steady: Advent’s managing director Georg Stratenwerth says the India strategy is something he calls the cold-calling effort—looking at a sector, breaking it down into sub-sectors and looking for targets. Ashesh Shah/Mint
About two years ago I came up with a recommendation whether it is better to look at this market opportunistically from London or to put up a team here. If you are one of the large PE firms with global presence it’s almost weird not to have a presence in an economy like India. So it has been a gradual move to the market as opposed to a big bang entry.
When can we expect Advent’s next deal?
I want my team to focus on what I call this cold-calling effort, which is basically you don’t have an existing relationship yet, so you look at a sector, break it down into sub sectors and look for targets. Take the industrial sector for instance. You can’t talk to (just) anybody who manufactures something in India, so you then chose sub-sectors who I feel are more attractive and then break it down to relevant companies of a certain size, certain shareholding structure that might be receptive to talking to somebody like Advent, and who may have a capital requirement sometime.
That kind of pipeline we have been building for two-three years and I really want to focus on that than opportunistically chasing in a sector-agnostic way. Having said that, the market has picked up considerably and we have been very busy working on transactions, some of which have been as a result of us proactively establishing contacts with companies, that have now happened to have capital requirement. So things are moving faster than we anticipated and we are quite stretched at the moment. So when and at what time will we sign on the dotted line, it may well be this year or next. We are here for the long term and are patient investors. We have never gone into a country and pulled out later.
What sectors do you intend to concentrate on?
Last year we initially spent a lot of time on healthcare services like hospitals, generic pharma companies and financial services. CAMs is an example in that sector. We have also looked at some broking businesses. Since we now have a full-fledged company, we have broadened that scope and are looking at industrial sectors such as power equipment companies, equipment that goes into both generation and distribution of power and some other financial sectors. We absolutely like to stick to the areas where we have specific knowhow that we can draw on.
What strategy have you mapped out for India?
Focus on the sectors that we know well, build a deal pipeline over time in areas that we want to invest in. The only difference is that like in Latin America and Europe we started off with slightly smaller investments, taking minority stakes as opposed to buyout transactions, knowing that things aren’t black and white and over time moving towards the buyout model. We will do the same here.
Do you plan to have an Asian or an Indian fund?
Asia was relatively late for Advent. We are the largest PE fund in Latin America and Central Europe and for both of these regions we have dedicated funds. In fact, we just raised the largest ever fund in Latin America of $1.65 billion. When you look from afar, Asia makes sense but then when it comes to Japan versus India it’s a very different market for us in terms of the type of investments we are likely to do, the mentality of the people, the growth dynamics of the economy and so on. To throw that in one pot doesn’t make sense. Now we have the luxury of a very large fund which is dedicated to western Europe and the US but with generous allocation to other countries. It’s $10.4 billion in size and was raised in 2008. So for the next few years we can dip into that pool of money and by the end of that we might consider something like an Asia fund.
What’s the rough allocation you have out of that fund to either Asia or India?
We could invest $2 billion in Asia, though there is no formal allocation. It could also be a co-investment with our Latin American fund, if there is any company that straddles both geographies.
What transaction size are you looking at?
We would like to do a minimum of $50 million of investments, so may be an enterprise value of $100 million plus and in more mature markets the transaction sizes are larger.
A lot of large foreign PE funds like TA Associates, Quadrangle, Bain and KKR have started making investments in India and are striking $100 million plus deals. Do you think the market has become more competitive?
Yes, clearly the space is competitive because it is an attractive sector. People push into those areas where successful firms can generate good returns. Like any other business we have to evolve with other businesses around us. The successful firms in PE constantly adapt to their environment. They have to become more active and their own value proposition has to be stronger. My experience of 20 years has been that the market grows as the awareness for PE increases and so the deal sizes will grow as a result of that. If we have a convincing proposition to make we can generate our own deals. So, I am not worried about that because though I think it’s competitive, I don’t think its any more or any less competitive than it was two years or when it will be 5 years ago.
What are the challenges you face in India?
The major challenge is that you are dealing with a lot of young ambitious people who have not yet been through business cycles. You are being presented with a very ambitious picture whenever you look at a business plan and people wholeheartedly believe in those projections. They are basically saying this country is growing at 9% because we are better than our competitors. When you have been in the industry for awhile you know nothing can evolve in a straight line, not just up and not just in a straight line. Even in a place like India. Of course the events of the last two years have sobered a lot of people. I think that there needs to be a bit more realism. I find the overly optimistic view the biggest challenge.
Would you do PIPE (private investment in public enterprises) deals?
We are not closed to the idea of PIPEs because we would be limiting ourselves too much. We look at significant minority stakes and will do so when we look at public companies. But we won’t look at purely passive stakes in public companies. It has to be a meaningful stake and a board seat.