Fairfax enters India to invest in local firms

Fairfax enters India to invest in local firms

Mumbai: Fairfax Financial Holdings Ltd, a $30 billion (Rs 1.3 trillion)-plus diversified financial services company that owns stakes in Kraft Foods Inc. and Dell Inc., is entering India to invest in listed and unlisted Indian companies, a senior company official said.

It will buy both minority as well as controlling stakes.

Founded by Indian-born Prem Watsa, 61, popularly known as the Warren Buffett of Canada, Fairfax has appointed Harsha Raghavan, former India head of private equity firm Candover Investments Plc, as head of the unit.

The investments in Indian companies will be made through Fairbridge Capital Pvt. Ltd, an affiliate of Fairfax.

“We have the ability to invest long-term, patient capital into Indian businesses," said Raghavan who, before moving to Candover, was executive director at the Principal Investment Area (PIA), the flagship $20 billion private equity fund sponsored by Goldman Sachs.

“We are free of any constraints around stage, capital structure, industry, etc. as long as the investment makes long-term business sense," he said. “We strongly believe in the India growth story and particularly see opportunities in consumer products, consumer services and niche manufacturing sectors."

Fairfax will also selectively incubate companies or build platform companies from scratch alongside partners—a strategy the firm follows in global markets. For instance, ICICI Lombard General Insurance Co. Ltd, the largest private sector general insurance company in India, is a 74:26 joint venture between ICICI Bank Ltd, India’s largest private lender by assets, and Fairfax.

Some private equity funds see merit in Fairfax’s strategy while others say there are challenges.

“New entrants in India are trying to take (a) diversified approach to investing," said Raja Parthasarathy, partner at IDFC Private Equity Co. Ltd. “A lot of them feel that the valuations have run up in India, so they have a ground-up approach so that all the value is accrued by them, even though it takes time."

According to him, incubation or platform deals happen in fragmented sectors, which offer robust growth potential in the long term. The financial services sector is one such area.

“They seem to have a lot more flexibility in investing, but when it comes to deals where specialization is needed or operational value has to be added, they will face competition from private equity firms that have entered the market earlier," said Avinash Gupta, head (financial advisory) at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.

“Fairfax got its name due to its philosophy of doing fair and friendly acquisitions. We decided to use the name Fairbridge to reflect this philosophy as well as the need for long-term capital," said Raghavan, who had helped Goldman Sachs PIA purchase low-cost cast metal parts maker Sigma Electric Manufacturing Corp. for $172 million.

Fairfax, in a way, is similar to Buffett’s investment firm Berkshire Hathaway Inc., which in March announced that it will enter India’s insurance turf as a corporate agent for Bajaj Allianz General Insurance Co. Ltd.

Apart from the insurance and reinsurance businesses, Fairfax has interests in other North American companies.

The Canadian firm has invested in pulp and paper maker AbitibiBowater Inc., American bank Wells Fargo and Co. and coal miner International Coal Group Inc., among others.

Berkshire owns stakes in a diverse range of businesses—confectionery, retail, railroad, home furnishings, vacuum cleaners, jewellery and media.

In 2008, Berkshire and Fairfax announced their first co-investment—Chicago-based building materials company USG Corp., in which Fairfax invested $100 million and Berkshire $300 million.

Fairfax’s book value has grown 25% every year, compounded, in the last 25 years, while its stock price has compounded by 21% every year, Watsa, a chemical engineer from India who founded the company in 1985, told his shareholders after its 2010 annual results.