Indian fin services to attract foreign capital: Blackstone

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John Studzinski of Blackstone Advisory Partners believes that even if the Greek issue isn't resolved to everyone's satisfaction, the likelihood of real contagion is lesser than what people had expected.

Talking about the enhanced liquidity situation since the beginning of this year, he mentioned that the year 2012 is going to be in a pause and people will be careful about where the cash will be deployed.

Talking about India in particular, Studzinski said that the financial services and the banking system will continue to attract lot of interest. On the other hand, places in India that involve land are going to continue to frustrate foreign capital.

Below is the edited transcript of the interview. Also watch the accompanyng video.

Q: We have spent all of January in the midst of all the Davos conversations, what will happen with Greece and it's a minute-by-minute account now of whether Greece has passed the austerity measures or not, it is closer to an orderly default or a disorderly default? Where do you think are we in the resolution process of this European debt crisis?

A: I think it's still working in process. It's not the answer you want to hear but what we see is there will probably be a constructive resolution, and in the last couple of hours, the austerity measures have been approved by the Greek parliament. But at the same time, that's a formal approval that doesn't necessarily mean that public opinion in Greece will go along with that. So in the short term, the markets will be comfortable that Euro 130 billion bailout will be put in place. The bigger and more important issue for people to think about is Greece still has to have an economy, and therefore, one of the components of the GDP is going to be in Greece in the future.

Q: Has your worst case scenario regarding Europe changed at all from the last time we met when you thought that the chances were high that Greece would default but it would be an orderly default and hence it would not plunge global markets into chaos?

A: I think right now people are thinking about the consequences if they can't come to a resolution and Greece has to technically default. I think most of the banks and the Troika understands that it has to do with awarding the perception of contagion and the whole notion of contagion has really been well discussed in the last 12 months. That has to do more with providing the right liquidity and liquidity lines for governments, particularly Italy and Spain.
 
But what is reassuring is, as we are talking about liquidity in the market, there has been a lot of financing done in the first month of this year and Italy is successful in the bond markets. So that on the other hand is pretty positive leading indicators that the markets are not shut, they are financing at rates better than people expected. Therefore even if the Greece issue isn't resolved to everyone's satisfaction, the likelihood of real contagion is less perhaps than what people had expected.

Q: The bond auctions have done fairly well according to many economists because of the kind of money that the ECB put into the system through what it calls LTRO, almost USD 500 billion of loans that it auctioned to banks. What do you make of the cash situation? We have started this year very flush with cash. Are we sitting on unprecedented amount of cash?

A: It is certainly unprecedented in terms of the last 25 years among American corporates and that's actually one of the unsung heroes in this global economic recovery. The American corporate is very strong, the German corporate is pretty strong and when you look at Japan, partly because of Fukushima and the need to diversify outside of Japan but Japanese companies have accumulated about a 1.5 trillion of cash and China has a lot of cash to redeploy.

So you have got a lot of cash, there will be a lot of strategies that this year will be implemented either through M&A but there will be some of that cash filter back into the job market. Some of the numbers you saw with the job numbers being better than expected last month had to do with the fact that American companies are not just hiring more people from places like Asia but they are also hiring more people back in North America.

Q: So do you think those will be the two key trends that explained where this cash is put to use? How do you see this cash situation playing itself out both in good as well as bad way because we will have to pay the price for all this enhanced liquidity over the course of this year and may be the early part of next year?

A: We almost have this barbell approach to the world right now. You have rich companies with lots of cash; you have rich sovereigns that are making direct investments for the first time. CIC has invested in Thames Water in UK and in the international power business of Suez. You have seen even here in India, Idea and GIC invest in HDFC and that tells you that they are making direct investments, they continue to be GPs and LPs but they are making direct investments and they are much focused. All this cash is focused on the EM consumer - the Indian, the Indonesian, the Chinese and the Brazilian.

The other end of the barbell is the other extreme. There is enormous debt restructuring going on, very high quality brand names in America such as American Airlines and Kodak are going through bankruptcy. Extraordinary these brand names going through bankruptcy but that's happening. That restructuring is taking place and the biggest one is the financial services industry particularly traditional wholesale banks, investment banks, retail banks, all looking at being turned down their heads in terms of what is their future business model.
 
So you have the extremes right now; so the cash in one side is potentially going to be redeployed for a lot of these distress situations and on the other side, there is a lot of restructuring. But 2012 is going to be in a pause and people are going to be very surgical, they are going to be very careful about where the cash goes. Although in the first month, there has been a record amount of investments. It's the highest M&A year in 4-5 years. I think M&A activity overall, certainly in North America last year, was up globally about 8%, this year it could be up 10-15%. So the cash will be used and there are a number of different situations where it can be deployed.

Q: Two questions coming in response to that answer, firstly are you seeing enough conviction whether it's in the private equity industry, the sovereign fund industries as you pointed out or even companies sitting on large cash piles to start putting that money to work already or is it in bits and pieces because all these players are worried about the volatility that Europe continues to present in the global arena?

A: The cash has been put to use, last year the top 10 M&A deals in North America was a USD 180 billion of cash, that's a lot of cash. So people are putting their money right there. I think partly because they are paying enough dividends already and people are very happy in many cases with their dividend yield. They bought back a lot of stock.

There is not much left to do and boards are saying okay fine, our cost structure has been simplified. We have streamlined our business units. We focused on number of core, conglomerates for the most parts have been restructured, I think there will be some more restructuring in conglomerates and maybe some companies will be demerged and simplified even further. But cash is going to be a very powerful tool this year for the foreseeable future.

Q: The demerger question is really on the table because last week Indira Nooyi was explaining why she thought that Pepsi doesn't need to be broken up. But to come back to the second question, based on your response from earlier that means the emerging markets especially countries like India with all its legacy issues and everything that we have seen happen in the last two years regarding corruption, are now going to compete not just with other emerging markets that maybe outperforming them; Indonesia, Brazil you pointed out but North America?

A: Absolutely, remember companies in America are still going to try to use a bad pun on India, land grab certain sectors within emerging markets. In China, it is going to be the consumer; I think in India it will continue to be technology services and other areas of telecommunications and probably financial services. In some cases there are too many insurance companies in India; you could probably do with a few.

Certainly, financial services and the banking system will continue to attract lot of interest. Remember, a lot of bankers find the banking system here to be a very well regulated, toughly regulated space. It is one the most respected banking systems in the world along side countries like Canada and Turkey because they just have their act together. On the other hand, places in India that involve land are going to continue to frustrate foreign capital because they are going to be very nervous about whether its retail or manufacturing. But I think retail is a good investment in this country because the Indian consumer is very exciting for a foreign investor.