Mumbai: Akhil Gupta, chairman and managing director of Blackstone Advisors India Pvt. Ltd, said in an interview that the private equity (PE) fund is working on several deals that it expects to close soon and that it’s the first choice for a great many companies. Edited excerpts:
Optimistic approach: Blackstone Advisors’ chairman and managing director Akhil Gupta says India can attract any amount of capital. India Today
It is about five years now since you started in India? Are you preparing for any exits?
Actually, it’s only just over three years since we made our first investment. In the US generally, the normal hold period is five-six years, but we expect the hold period in India to be higher because India is a growth economy. We expect continued growth. Hence, we would like the value of our investments to keep growing. We have made the investment and all the hard work is done. It is now a question of benefiting from continued growth of the Indian economy.
Having said that, we are always working on mergers and acquisition activities. Also, there could be a special reason why we may think of exiting, if such opportunities arise. However, at this juncture, there is no plan to exit any company.
You have invested strategically in a few chosen sectors such as BPOs, infrastructure etc. Do you plan to merge these businesses?
There are three themes we have pursued in India. Domestic demand, infrastructure and lastly the labour and talent arbitrage. If you take Gokaldas and Intelenet, they are investments in the space of labour and talent arbitrage. If you look at Nagarjuna Constructions, AllCargo Global Logistics Ltd, Machine Tools Aids & Reconditioning Technologies Ltd, Gateway Rail Freight Ltd, they are all infrastructure and others such as Emcure Pharmaceuticals Ltd, Nuziveedu Seeds Ltd and Jagran Media Network are a play on domestic demand. We don’t see any business logic of combining any of our existing portfolio companies.
Blackstone appears bullish on media businesses? What attracts you to this sector?
We have tried investing in several media assets before and for various reason it didn’t work out. We believe that media is the best way to play the personal consumption theme. Media is a much diversified platform. It also has a huge operating leverage, much more than any of the consumer businesses we have seen and significant barriers to entry.
What is an average period of holding?
Most PE (private equity) funds have an investing period of five to six years. We try and get out of all our investments in 10 years. This results in an average holding period of five to six years. This is a great strategic advantage for PE players vs. hedge funds as we can time our exit. When Nagarjuna went from Rs360 to Rs40 it didn’t bother us. However, for the hedge funds it meant a disaster as they were forced to liquidate due to redemption by their investors. NCC is back to 190 now, more than five times in a year. We are not surprised at all. This is because we monitor two factors very closely. One is the investment thesis and the other is operating performance. As long as the reasons we invested are still intact and the company’s operating performance is tracking the plan, we remain unconcerned and continue to focus on adding value and improving the company’s competitive position. A good comparison is a T20 versus a Test match. In a Test match, even after receiving a follow-on you can still go on and win. We play the Test match, not T20.
How much have you invested in India and what are your future plans?
We are very happy with the portfolio we have in India. The last time our chairman came down he said that we are very optimistic about India and would plan to invest $2 - $3 billion in India in the next five years. We are working on a few deals and will hopefully close most of them. That would take our investment to $1.4 billion in the first five years. Also we have doubled the team as compared to when we made our first investment over three years ago. We have 16 people in the team now. We believe we are the most sought after PE firm and first choice for a great many companies. They recognize the benefits of working with Blackstone. We have have an operating team led by eminent senior professionals including Richard Saldanha, Gautam Chakravarti and Amit Dalmia, who actively work with and mentor managements of investee companies to add value to their strategies and operations and enable them to scale up to the next level. Another key differentiator is that we bring global linkages and synergies for our investee companies through the Blackstone portfolio globally. It’s only when we turn them down that many companies go to others. It’s only 10% of the deals that don’t come to us because these companies have better relationships with the other PE firms. But almost 90% of the deals come to us.
What about buyouts? You were one of the first global buyout firms to come into India.
I would just say that’s pure luck. I doubt there are many buyout opportunities now. We have done three buyouts in 10 deals we have invested/committed so far but I doubt if we will do three buyouts in the next 10 deals we do. Entrepreneurs see what we see. They see that the value of the company will grow 2-3 times in five years. So why should they sell now? There are certain exceptions like Gokaldas where the promoters wanted to take the company to the next level and believed they could do that only with our (PE) help. Intelenet was a corporate deal where Barclays wanted to cash out for regulatory reasons. CMS was an interesting buyout. This is where the entrepreneur was saying, look I have built a great company and I want to take it to the next level, so I need professional management but I can’t attract them on my own. So, he said, Blackstone I trust you. I will sell you a controlling interest. Bring in the right talent and then on the half that I have not sold, you will give me three times the money so I am better off giving the control to you (the PE). This is an interesting deal where the entrepreneur has kept one half and has given us the other half and is looking to grow it with us. So though it’s a small deal it’s very important to us. We take it very seriously and there was one of our people dedicated to only working with them for a year. The success of the deal will pave the way for many more control deals in the future.
There is a talk about Gateway Distriparks, the promoters wanting to sell out. So would you buy it or let AllCargo acquire it?
For us it would be a conflict of interest because we are invested in Allcargo and we generally do not invest in the competitor of our portfolio company. Especially in this case they are direct competitors for the same business of Container Freight Stations. It doesn’t leave the right kind of relationship and relationship is very important to us. We want to leave a legacy. They should feel that the best decision they ever took was to partner with us. When GDL’s stock price went down it was a steal, but we didn’t want to buy for reasons mentioned above. So we suggested Allcargo to buy. They bought some (equity) and they made a handsome profit on that.
Do you think you can facilitate an acquisition between them?
I don’t think the companies are waiting for that. We have relations with both of them and we have to be fair to both. GDL will take about two years before it realises its full value as it has to make its subsidiary GRFL profitable. We are working with GRFL management very closely.
You have had a background in telecom, so do you think telecom companies are a steal at the valuation they are today?
You know sometimes when you know a sector so well you don’t invest in it. We have actually looked at every deal that has been done in India in the telecom space. We avoided all those deals as we were worried about the impact of competition and regulation over a five-year period. For some time it seemed as if we have missed the opportunity to invest in telecom. Today it looks like we did the right thing. Telecom was one of the sectors which India could showcase to the world – one of the best regulatory regimes and the fastest-growing mobile market in the world. The regulators have completely destroyed the profitability of the mobile sector by allowing hyper competition -- 12-14 players in every circle is not a healthy market structure. As such, currently it is not an attractive sector for any private equity investor. Our investment in telecom assets results in huge mis-allocation of economic resources which our country can ill afford.
What about tower companies?
Tower companies are much more attractive. They are worth re-looking at. Their valuations have come down. The problem with the sector was that some of the investments were made assuming that four more mobile players will come and undertake national roll-out needing space on towers. None of these players have been able to make any significant roll-out because it doesn’t make any economic sense. We have looked at tower assets before and we declined to invest. We had the advantage of a 360-degree view on the sector and so if we look at all these business plans and believe in them there will be two times as many towers as is required. So in our view obviously all the business plans are wrong. I must admit we could be wrong about this view but that has been our view. Now the government has auctioned spectrum for broadband wireless and 3G. The roll-out of these networks will create significant opportunity for tower assets, so we are looking at these again.
What about power? Are you gearing up for investments?
It is an important sector for us. We are very closely looking at it. From the pipeline and the quality of deals we are seeing, we could be a big investor in the power sector. We want to invest in the sectors that are important to the Indian economy because that’s where we can make good returns also. We believe it’s the right time for us to be in the power sector. The window is there for the next 2-3 years. After that it will become like telecom. We are working on several power deals. We won’t hesitate putting in $1 to 1.5 billion in the power sector. Of all infra sectors we find power most attractive.
Would you look at roads and airports?
No. Airports are more of a real estate play not truly a PE investment. The way we are playing roads is through our investment in Nagarjuna Constructions. We are encouraging them and advising them to go aggressively in the road sector now after Kamal Nath has taken over the surface transport ministry. He understands the issues faced by the industry and is a dynamic leader and an amazing administrator. NCC had actually withdrawn from the road sector for the last two years. We lost a good amount of road contracts and almost 20% of the revenues. We diversified in the power sector and metals and mining space. Today one of NCC’s greatest strengths is that it’s one of the most diversified construction companies. Now we have gone again into roads and recently NCC won a Rs1,000 crore road contract and there may be another one in the making.
There is a feeling that smart money from India is exiting or going abroad. There’s the Bharti Zain deal and Indian promoters such as Ajay Piramal are selling out, whereas Mukesh Ambani is very bullish on India and telecoms?
These are smart deals. I would expect that Piramals will invest most of the funds in other sectors in India itself, because there is a lot of action here. You are right, even Mukesh Ambani appears to be very bullish and he’s supposedly lining up huge investments in India in new sectors. He is very bullish on the power, consumer and pharma sectors. So are we. Mukesh is going where his strength is. He can really build a nationwide broadband infrastructure faster and cheaper than anyone else in the country. Not many people may remember it now but, it was Dhirubhai’s vision “to make a phone call cheaper than a postcard” enabled by Mukesh Ambani that made the telecom sector what it is today. Had we (government) not made the mistake last time of adding four more players I think we would have been (one of) the most dynamic telecom sectors in the world.
The Telecom Regulatory Authority of India’s estimates for broadband are very modest—20 million subscribers in five years.
Yes they are modest. My view is that he (Mukesh) will be the catalyst to enable India to surpass that.
At an analyst meet, RIL said they hope to get 100 million…
Yes it’s a good aspiration to have. Nobody would have imagined India would have so many mobile subscribers today. The Indian market is very price sensitive and that’s why someone like Mukesh Ambani can really make a difference to the market because he will bring the costs down dramatically and then people will follow him and the market will expand dramatically.
Do you sense that the 2007 euphoria has returned?
India can attract any amount of capital. No country has the fundamentals that we have—8-10% growth for the next 10-15 years, great free market and democratic institutions, good stock markets, a good judiciary system. But the problem is also that India is one of the (most) difficult places to invest in. The famous joke is that it is much easier to invest in China than in India but it’s much easier to take money out of India than out of China.