Find out: 4 sectors Apax Partners is bullish on

Below is the transcript of the interview on CNBC-TV18.

Q: We are talking about the new government coming on board, a lot of hope, lot of optimism about India being at an inflexion point. Do you really believe that we are at a point for a turnaround and do you believe that the new government is likely to usher in a change?

A: I think this will take a while. We are very positive on the country, we have seen the performance of the stock market and investors are very positive. However, the turnaround will take sometime I believe. This is because the slowdown itself took two to three years for growth to come from 7-8 percent down to 4.5 percent. So the turnaround also will take in our estimation between 12-24 months. We should not be expecting miracles in the short-term.

Having said that there are a lot of positive factors – new government that is focused on reducing red tapes, simplifying laws, improving the environment for investment; number one. Number two the global macro which has led to as we have seen recently a very sharp reduction in oil prices and generally commodity prices overall which will be beneficial to an economy like India which is in general an importer of commodities especially petroleum products and finally then long-term macro fundamentals and demographic fundamentals of India – a large middle class, a young population and a lot of the demand for consumer goods products, financial services which will come through over the next several decades. So, for all those reasons we are very positive on India going forward.

Q: Are foreign investors like yourself changing the way they see India and now going forward would you specifically look at hiking up your investment portfolio in India?

A: At one level we have to pay attention to the macro. However, we are micro investors which means we look at great companies, great management teams, great sectors and sub sectors. So as I said, the macro environment does matter. The fact that there is a new government and there is positive momentum is a great plus but there is money to be made we believe in all markets.

Q: You have had four large significant investments in India over the last four years. There have been Global Logic, Patni – these are significant investments but the run rate has almost been one per year. Can we say that with things likely to see a turnaround would you say that 2015 you may increase your run rate now? One per year is conservative to an extent.

A: That fits our business model. We have a reasonably hands-on approach with the companies that we partner with. We feel that it is important to be value-adding investors, to be very clear in value creation plan, what is our value creation plan when we partner with these companies and then to put all of our resources behind delivering the drivers of that value creation plan.

So, for example you quoted iGate. There the Apax funds backed iGate to acquire Patni and then after the transaction was done there was quite a lot of work required in the integration of the two companies, in the open offer, in the delisting of Patni, in various work streams; those are examples. It is not possible we feel to do that with too many companies in any one given year.

So, our investment pace will probably stay where it is. I don’t see us doing several deals in a year for the simple reason it is not possible to partner with these companies and to be as active partners in the creation of the value that we have done in the portfolio so far. So, I suspect the investment pace won’t change. We are always looking and hoping for larger cheques; that is really our focus.

Q: So the ticket size may increase?

A: For the right opportunity.

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Q: If I had to compare Apax to your immediate peers in India, would you say that Apax has been conservative in India when it comes to investment?

A: I guess the question is how you define conservatism. Is it in terms of number of transactions done over a period of time, is it the amount of capital deployed over a period of time or is it in terms of the returns achieved? I would say in terms of number of transactions for sure but as I described it that is sort of inherent in our business model and how we approach transactions.

In terms of capital invested or capital deployed, the advantage of focusing on larger cheques means that although you do fewer deals, if they are bigger deals you probably invest as much capital or perhaps even more capital than some of our competitors and peers over that same period of time.

In terms of returns, time will tell but a careful, cautious approach with a very clear value creation plan and then a plan as to how you are going to drive the value and execute against that value creation plan, we feel that works for us. So, I don’t know how to qualify your term conservative.

Q: Are you bullish about Indian prospects when it comes to investments?

A: Absolutely. If you look at India and Indian macro versus what is happening to growth in the rest of the world even some of the other large emerging markets, we are positive on the cycle for the reasons discussed.

Q: People are talking about how valuations are now picking up, we have seen the capital markets, they have been volatile but we have seen them pickup. Are you now gearing up for possibly looking at exits in any of your portfolio companies or typically the size or the period that you wait is five to seven years; is it early right now for exits?

A: It is early. We exited our first investment or the Apax funds I should say exited their first investment in India which was Apollo Hospitals. That was a six year investment hold and was exited in 2013. The other investments that the fund has done are younger and so I don’t think there is any immediate prospect of an exit with any of them.

Q: Telecom, infrastructure is a place which needs investment. Apparently PE players have been talking about prospective investments but we haven’t seen deals come into the market over the last two years at least. Would you stay away from telecom for sometime?

A: I think the telco industry has seen very good growth over the last if we take a 10 year perspective. If you look at the number of subscribers today versus 10 years ago, it has been very rapid growth. It is now reaching a point of maturity where penetration growth will slow down. There needs to be some more market consolidation, the number of players that are active in the market will continue to come down. There have been some exits as well.

Mobile data will provide a next leg of growth for the industry most likely. Voice and penetration has driven the growth so far over the recent years but data like it has everywhere else in the world will take an increasing role in India as well. From our perspective as investors looking at that industry, it needs to be at a point where the regulatory framework is very clear, where the market structure is perhaps a little bit more shaken out if I can use that term and is more stable. That feels like a better environment to be investing. So, it is an industry we have invested in globally and we know but we continue to wait and watch.

Q: Once the spectrum auctions are out of the way, once there is some clarity with respect to the M&A regulatory framework would you in that case at that point look at the traditional telecom companies because there is consolidation happening, traditional telecom operators, telecom infrastructure players?

A: I think we will continue to watch the industry and see how it evolves.

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Q: We are talking about how the government is now coming and trying to make changes. Where do you feel are the bottlenecks that need to be cleared out?

A: The government has taken a number of steps already. Of late, we have seen the ordinances on Land Acquisition Bill and on insurance and certain recent moves around public sector banks and the statement of intent that the government intends to reform the way public sector banks operate. We feel those are all positives. There needs to be continued focus on reform. There is just a lot of if you like the thicket of regulations that needs to be cleared out. There is a lot of blocking and tackling just very simple everyday rules, regulations, inspections, laws that companies have to deal with which make doing business difficult. I would encourage the government to continue to focus on that blocking and tackling on the one hand.

On the other hand, the other big item for which everyone is waiting for policy announcements, there again have been some statements of intent but no announcements of actual laws is around the entire tax regime. The finance minister in his previous Budget statement made a statement in parliament that he wanted to create a non-adversarial tax regime which was a statement of very fundamental reform of the way tax works in this country. I think investors are waiting to see the fine print and the implementation of that.

Goods and services tax (GST) is a big item. The tax on indirect transfers, sort of the Vodafone issue, is a big item and the way tax rules and regulations are implemented, the interface between the tax department and companies is also for us another major item. So, we are waiting to see some announcements and also some action as far as implementation goes on those fronts.

Q: The Make in India campaign of the government, how significant is that in encouraging investment? As a foreign investor yourself the Make in India campaign, policies or the areas that it is using to be able to attract investments in manufacturing and other areas how significant is that when it comes to actually seeing on ground investment coming?

A: I think it is a very positive step and we whole heartedly support the government’s vision along those lines. The reality is that with 20 million people joining the job market every year they can’t all get jobs in IT or in the services sector. Manufacturing has been the world over and over a period of centuries a key driver of development in country after country and I don’t think India can escape that. So, I think it is very positive on the one hand.

So far it is still a little bit early from what I am seeing on the ground in terms of seeing that translate into action and the implementation of the rules and regulations making business easier to do on the ground, the freedom for companies from the sort of new licence permit raj as it were, that we don’t have the old system of licenses and permits but it is almost the new inspector raj which we need to get away from and that will need announcements and intent at the central level but it also needs implementation on the ground at the state level because as we know companies have to exist in the reality of each state and each location in which they operate. All of that hard work will be required but we think it is a very positive step and we are looking forward to see the results on the ground.

Q: From all that we have discussed, summarising do you really feel that India is at an inflexion point and do you now see India differently in 2015-2016?

A: We do feel that it is at an inflexion point. The disappointing growth of the last five years does need to change. The government has started out with some very positive policy announcements. The global macro with the reduction in commodity prices and fuel prices helps and we are hoping and we will support a turnaround in the investment cycle in India which hopefully over the next five years will make for much better growth than we have seen in the previous five years.

A: Over the last eight years that we have been active on the ground in India, the Apax Funds have invested about a billion dollar of equity mainly across four transactions. So, larger deals, average cheque size of USD 250 million each roughly across all of the Apax sectors effectively. So, we will continue to hunt for transactions in those sectors. As the economic environment improves, our belief is that there will be more deal opportunities.

Q: As you said there are four sectors that you specifically focus on, within those sectors what are the areas that you are expecting to see maximum traction from, from the conversations that you have had with portfolio companies in 2015?

A: I am positive across all of the Apax sectors and those are technology and telecom, healthcare, consumer and retail, and financial and business services. There are reasons to be positive on all. Technology is more driven by demand outside of India, more export-oriented.

Healthcare tends to be a reasonably steady growth throughout cycles and healthcare you can divide into pharmaceuticals which is a mix of domestic and foreign demand and healthcare services, hospitals, labs, etc which is more driven by domestic demand but tends to not be that linked to the economic cycle.

The other two sectors, financial and business services for one and consumer and retail for the other do tend to be linked to the cycle and if one is positive over the next 5-10 years around the economic cycle in India around growth, around the macro and the longer term factors then these are sectors that will do very well. So, to summarise, we are positive across all of the sectors that we invest in; there are reasons to be optimistic for all.