Mumbai: Cigar mogul Edgar Cullman Sr stood on a tottering chair on Mumbai’s Taj President terrace as he gave a speech in his throaty New York accent. “I like to invest in companies and feel the people themselves,” the guest of honour told private equity (PE) investors and Indian entrepreneurs, including those his fund Helix Investments Advisors Pvt. Ltd has backed.
The 90-year-old ex-chairman of General Cigar Co. Inc.—known for selling premium American cigar Macanudo—was equally wobbly when his grandson David Danziger approached him in 2005. The family had sold the business after more than four decades of running it, and Danziger wanted to start a private equity fund in India. “I was worried,” said Cullman Sr, who had visited India just once, 17 years ago.
India-oriented: (L to R) Managing members of Helix Investments David Danziger, Edgar M. Cullman Sr and Edgar M. Cullman Jr. The Helix fund was constituted in April 2006 with a $100 million corpus. (Photo: Abhijit Bhatlekar/ Mint)
Danziger, who had been coming to India annually since 1991 to visit Indian in-laws, had noticed a clear change in India on a 2005 visit. “I came back (from that visit) absolutely convinced that India was going to move forward and made the case to Edgar (Cullman Jr.) and my grandfather,” Danziger said. He also convinced his friend John Fletcher III, who represents the founding family behind Bloomingdale’s, the iconic New York department store. And, the Helix fund was born in April 2006 with a $100 million, or Rs446 crore, corpus.
Around that same time, other American and European business families started gaining interest in private equity investing abroad, and India has been a target for many as it has for the Cullmans. There is little data on these deals that are often done privately, sometimes even at social events with no lawyers around. But experts in the US and Europe, who consult with such families, said the trend is growing.
Helix is the only publicly known example of a formal fund being set up to focus exclusively on India. Mint recently learnt that the George Kaiser Family Foundation, a charitable body set up by America’s 26th richest man, according to Forbes magazine, has been investing in India and other locations through Oklahoma-based Argonaut Private Equity since 2004. Hedge fund guru Nicolas Berggruen brought $300 million from his family-seeded $1 billion pot to India in September 2006. Some experts Mint interviewed said they knew of family partnerships being developed with Indian families, but did not reveal names.
More families making direct private equity investments in India, as opposed to investing in a private equity fund as a limited partner, offer an alternative to Indian entrepreneurs seeking capital for growth: investors less focused on when they want to sell out. “One of the last things that we talk about is exit,” Danziger said. “Which would you rather have: a 30% return for a few years or a 20% return for 20 years. And I think that’s the way we think.”
Such business families are increasingly turning to private equity after they saw their businesses, ironically, bought out in the boom for such buyout firms in the last few years. And, now they have the task of managing the cash they are sitting on. “Entrepreneurs who were used to being in the family business (now) face wealth management issues that they don’t know much about and find, frankly, boring,” said Joachim Schwass, professor of family business and entrepreneurship at Switzerland’s International Institute for Management Development, who recently co-led a survey with the European Private Equity and Venture Capital Association on the subject. Apart from the entrepreneurial DNA that such families carry, the study found family offices are ripe for private equity investing as they are less regulated and focused on the long-term.
The amount of money business families are allocating to private equity has also increased in recent years. Private equity, part of the so-called ‘non-traditional asset class’ today “represents up to 25-35% of a (family) portfolio, as opposed to 10% not so long ago,” said John Davis, faculty chair for the families in business programme at Harvard Business School.
Increasingly, many long-time business families are more comfortable with investing in another entrepreneur rather than abstract financial products, particularly in the aftermath of the US subprime crisis. And “there is an orientation back to things people can understand, operating businesses with old-fashioned cash flows,” said Toby Moskovits of Heritage Equity Partners, which guides families on direct private equity investing.
While most families in this situation prefer to invest in their home country for similar reasons, many families are now involving the second and third generations who are more comfortable with cross-border investing. “We call it a new class: entrepreneur-investor,” said Moskovits, who held a conference in New York earlier this month on changing from company owner to private equity investor. “It is the first generation of wealth or one and a half generation of wealth…(who say) ‘so we sold the business, what next?’.”
Still, some traditions stay. In the cigar business, Cullman Sr noted, business very often was wrapped up on handshakes. “I think in India too there are a lot of handshakes. It is not just what is written down,” he said. “It is the spirit of the deal.”