General Atlantic LLC, the New York—headquartered $17 billion private equity investor, plans to exit from at least one high-profile investment in India this year.
It may sell part of the 30% stake it acquired in Genpact at a cost of $250 million, after the Gurgaon-based business process outsourcer makes it debut on the New York Stock Exchange in next few weeks with a $600 million offering. It may also sell its stake in the Mumbai-based Patni Computer Ltd in which it invested $100 million for a 21% stake in 2002. Since then, a part of this stake has been divested through a public offer and people in the private equity business say General Atlantic is in talks with IBM Corp for selling out the remainder.
If these exits materialize, they will actually boost GA’s profile in the Indian private equity market, in which it was, relatively, a late entrant. They will also help firm up the company’s next big bet on India–infrastructure. And General Atlantic’s recently concluded $115 million acquisition of a 5% stake in National Stock Exchange indicates that it is also ready to move up from mid-sized deals.
Mark F. Dzialga, managing director and vice-chairman, investment committee, spoke to Mint from New York on the firm’s investing approach and its new mandate for India. Edited excerpts:
Today almost half of GA’s assets under management are in emerging markets, chiefly China and India. Is too much money flowing into these markets?
We view ourselves in GA as being in the growth equity business and as a result we feel strongly about the need to be in the markets that have more growth orientation. Which is why we are so active in what India has to offer. I do think there are more and more investment firms and people seeking to invest in India and there is a risk that the market gets ahead of itself and there is the potential to overheat. We’re seeing some signs of that today. We see some very good companies that get valued at levels that we’re not comfortable with and with that comes some natural risk. The good news in that is, which is different from the US market, I don’t think you’ve seen firms using significant amounts of leveraged borrowing to make those new investments. That provides a much greater base of stability. If the economy softens or if the rupee continues to appreciate, that provides a larger margin for error than what you see in the US where they are borrowing huge sums of money to finance buyouts of private companies. We feel very good about the staying power that India has to offer.
You entered India in 2002. Some of your peers, such as Warburg Pincus, Actis and Citigroup Ventures, had made significant headway by then. Why did you wait?
There wasn’t any specific design that pushed us in 2002. If you see, much of our early activities were around BPO’s. A lot of our new investment activity in the US and Europe between 1999 and 2001 was taking place in the outsourcing markets. When we started to look for the next generation of companies around 2001, that’s when India emerged as something we needed to take on more seriously. We actually started spending real time in India in 2000 and it took us 18 months to get comfortable. We had to understand the market and the regulations. We had to develop enough relationships to be credible with promoters here before we we made our first two investments—Daksh eServices and Patni Computer.
Asset management: Mark F. Dzialga of General Atlantic LLC.
With the exception of Patni Computer, the first flush of deals here are all mid-sized investments, $20-70 million each. But that seems to be changing now. Are you going after bigger deals?
We’ve always viewed ourselves as stage agnostic. So we are more interested in the potential of the opportunity than in the exact dollar size we’re going to invest, although we pay attention to both. We are moving in the direction of investing larger amounts of capital. We’ve done things as small as $20 million and we’ve considered things as large as $400 million. That seems like a good range. I can see ourselves going higher than that. We’ve certainly looked at things that are higher. We’re increasingly more comfortable exposing more capital to the market.
Are deal sizes also getting bigger because you are looking beyond your sweet spot so far—technology services and technology-enabled services space?
I’d say it’s three things. One is that valuations are going up, clearly. Two, some of the sizes of companies we’re looking at are just fundamentally bigger. Some of the ownership stakes we’re looking at acquiring are larger as well so it obviously involves more capital. And the last thing is that we are looking at areas that have a greater level of capital intensity such as financial services, health care, some of the infrastructure in and around India. We’re seeing some very unique opportunities to involve larger investment sizes and we’re very comfortable with that.
How do you define that opportunity in Indian infrastructure now?
It’s a fabulous opportunity —everything from engineering services companies to the other end of the spectrum, actual companies that are executing these projects. So whether it is building roads, bridges, tunnels, transit lines, new marine ports, new energy companies, it is a whole series of things that you think of as India’s infrastructure. We are actively looking at all of that. I don’t think we will cross into the fundamental real estate business, that’s a different animal.
Does GA do infrastructure deals anywhere else in the world?
We have done some investments in engineering services companies but not in the raw construction business.
What will be your chief investment themes here over the next few years? Do you expect to exit most of your existing portfolio first?
The ones that are top of mind for us would be infrastructure, financial services and health care. Then if you add the traditional stuff that we’ve been doing in technology services and tech enabled services. To me those are the really big four theme that we’re focused on right now. I don’t think there is a specific strategy on exits first and fresh investments later. You should probably expect us to make two to five investments a year in India and the objective, based on the resources we have, is to have in the intermediate term 10-15 companies that we’re actively involved with in India.
There have been rumours of Patni being in talks with IBM for possible acquisition. Given the close relationship you share with IBM, is there ground to these rumours?
I don’t have any comment. I would say in most situations when it comes to selling our position or exiting a company, it’s a decision that the management team reaches, not GA. We rely on the management team to tell us when has a market changed in such a way or evolved in such a way that suggests to them that the right thing for the company is to become part of something larger. Unlike others, we are not in the business of telling promoters when they need to sell their companies or take them to public.