India story intact; focus on long term: Warburg Pincus

Nothing appears to be going right for India at the moment. And many fear that the worst may still be ahead. But in this adversity could lie opportunities feel Charles Kaye and Joseph Landy, Global Co-Presidents of Warburg Pincus and colleagues for the last 27 years.

Also Read: Ongoing capital inflows may prevent fall in rupee: Angel

The duo told CNBC-TV18's Kritika Saxena that they are not too perturbed by the gloomy macro-environment, and feel there can be large investment opportunities even in times of slow growth.

They are among the minority who believe that the India story is still intact, despite the volatile currency and depressing economic indicators. And the outcome of the general elections won't affect their investment decisions either, they say.

The strategy is clear: focus on the long term.

For all the dire predictions by global rating agencies and international bodies, India still remains one of the most important geographies for Warburg Pincus.

They are bullish on sectors such as pharma, IT and telecom. They find the infrastructure space interesting too. For them, telecom – Bharti Airtel - till dates remains the company's biggest success story in India. According to them, the Aadhaar programme will open up lots of exciting opportunities.

Below is the verbatim transcript of Charles Kaye & Joseph Landy's interview on CNBC-TV18

Q: You have been working together as co-heads for 15 years handling assets under management worth around USD 45 billion if you look at the entire gamut. Are there any clashes that you have had when you talk about investing together?

Kaye: Our firm has a long rich history. We were founded in 1966. So, we are one of the pioneers in the private equity business. We were early in emerging markets particularly in India where we have been active for the last 20 years. Joseph and I both grew up inside the firm.

Our entire careers have really been there. We have worked together for last dozen years or more running the firm and our firms have succeeded into its next generation and it has been a great experience, and India has been a particularly special place for us.

Q: You have brought the executive management group to India for the first time. What made you choose India as your destination considering the fact that India is going through a slower growth story? There have been concerns, skepticism about if at all India will be able to go through the slowdown phase. What made you choose India as the destination?

Landy: With the way that our firm works, we have a one fund investment concept and we invest in a diversified group of different industries. We do that in a diverse set of geographies around the world. India has been one of our most successful ones through the years.

We are able to bring a lot of our domain and industry expertise bring it to our professionals who are here working in India every single day. So, it is a bit of a matrixed concept which we are able to put into real practice when we come to India together as a group.

Q: We were talking about India growing about 8-9 percent that is far gone. We are taking about 5-6 percent, where do you stand?

Kaye: We have a different perspective because we have been in India for 20 years. We were introduced to India in the mid 90s when just sort of post the reform package from the early 90s and the country really began to take off and we were part of a number of early successes that really helped to define (not sure) the industry, Bharti probably being the one people must know about. There are number of other businesses HDFC and so many other things that were part of our early history here.

We experienced the uplift. Parts of the industry really grew up here more in 2005 and 2006 and didn’t experience sort of the ups and its seen more of difficulties in the last few years. So, we have always had a longer view that the Indian story despite the ups and downs and volatility that is part of the storyline always here, we have got our view on what the long term opportunities there is in India, we accept them. What has always motivated us more here are the great entrepreneur success stories; those marvelous tales that we have been able to be a part of over the years.

It is at moments like this when the tone may be more pessimistic that in fact we tend to be leaning forward a bit and think that the opportunities may be even more robust and rich for us- that we can find something really interesting to do.

It was a chance to get our entire senior management team here, get to experience a little bit of the feel and a chance to interact with our colleagues and remind ourselves about what the opportunity is in the long run and make sure we are leaning forward and sufficiently aggressive despite the sort of the tone in the environment at the moment.

Q: Are you bullish or bearish about India?

Landy: I am very bullish about our position in India at the moment. When the growth rates are high, it tends to be a lot more competitive for industries like the private equity industry.

When it starts to cool - you are talking about 5 percent kind of growth – as we have been sitting out here we are actually finding more chances to put capital to work. More entrepreneurs who are interested in talking to us as being their financial partners and other competitive activities such as the public markets or other firms that may not have been as committed to the country we find that it is easier to compete against them and to find places to put the capital to work.

Kaye: We always remind ourselves life is never quite as good at the top as you think and it is never quite as bad at the bottom as you think.

Q: You have invested across emerging geographies and the two of you have been bullish about these areas. If you look at Warburg's global investment strategy how does India stack up versus the other emerging geographies considering other emerging geographies are also in a bit of pain currently?

Kaye: Everybody likes to do a lot of the comparisons and the India-China one in particular. The reality is, we have been an active investor for 45 years. We have been in emerging markets, particularly in China and India for 20 years. We were early in these markets and established ourselves in them and we sort of recognise the ups and downs and sort of tend to go with them.

We do less of one versus the other and our view has always been establish a presence in the market, be prepared to be there for the long haul, learn how to operate within the environment with all of the turbulence that can sometimes be a part of it.

Q: USD 3 billion is how much you have spent in India so far which is significantly higher than some of your peers. Before talking about your peers I want to ask you will this run rate continue and can there be any kind of significant change in your investment strategy either ways? Are you looking at becoming more aggressive or more conservative?

Kaye: We have always been unusual and that we run one large global fund and it invests in all the variety of industries across energy, technology, healthcare, financial services, consumer industrials as well as across the world in US, Europe, China, India and Brazil and elsewhere. We do it on purpose as it does not create these predetermined allocations that says how much are we going to invest in one place.

We want to react to the opportunity set as we are seeing it and sort of evaluate things more on what we are seeing there versus a lot of predetermined buckets if you like.

We did just complete raising of fund of a little more than USD 11 billion. We have got fair bit of capital to spend. India has been a place we have been successful over a long period of time including in some cases in a significant sense where we can invest meaningful amounts and there was an individual situation.

We spend enough time here that we understand the relative cycles that go up and down and India has clearly been one of the bottoms of the mood swings specially in and around the variety of uncertainties surrounding politics and looming elections and we get all that.

We have lived here all enough that we understand the environment, but it is kind of that exact moments we kind of keep meeting to remind ourselves that it is where some of the most interesting opportunities can come form.

It is not a predetermined amount here, but as you said we have been prepared to make large individual bets and do have a large portfolio here and it has been successful for us. So we are going to keep doing that.

Q: The sense that we have been getting is that private equity investors, global foreign investors have pushed the pause button for sometime till the elections happen. What role do the upcoming elections play when you look at investing in India? Would you possibly wait till the elections are cleared out?

Kaye: The country is in the midst of a great debate right now which is part of the sort of vibrant democracy that's India. We don’t think the looming election is something that is going to prevent us from doing anything at the moment.

The reality of our business is about staying aggressive, looking for opportunities when they come. We always think about what the context and the environment is.

It is always fascinating to watch the Indian political scene. It is always interesting and pretty vibrant. It is something we pay attention to but it is not something that impedes our ability to do business.

Q: In terms of regulatory clarities there have been uncertainties that Indian regulatory scenario has been seeing. What are the hurdles that you think the Indian government needs to clear out to attract and increase foreign investment? What would you like to see cleared out?

Landy: We think that some of the regulatory roadblocks if you will tend to be great barriers to entry if you pick the right management teams. We spend a lot of time vetting our management teams, really working through what the issues are and thinking about how they are going to build great businesses.

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Q: What are the areas that excite you over here? You have been across various sectors technology, energy, auto components, telecom, what are the areas that excite you?

Landy: I think we continue to be quite interested in what is going on in healthcare and pharmaceutical industries in this country and there is a lot of opportunity for that. There is a lot of opportunity in the technology, media and telecom sectors and where we have been quite successful in the past.

We see it - it is a way that India continues to differentiate itself vis-à-vis other geographies around the world. Infrastructure investment always remains quite interesting to us. We need to be quite pecking in how we are going to invest in that sector but there are opportunities that we are seeing. We like the energy business and we think there are lots of opportunities to think about energy in this country.

Kaye: Beyond that I would say we have had a long history of investing in and around financial services. One of the first things we did here is with HDFC and we have maintained a great relationship since. We are a long time investor in Kotak Mahindra Bank which we completed our exit earlier this year.

Most recently in the last year we have invested in Capital First, previously Future Capital. We came out having built the ICICI retail bank and building a very interesting non-bank finance company and at the same time we are also investing in AU Finance with Sanjay Agarwal in Jaipur in and around auto leasing and truck leasing business.

Q: How is telecom looking like for you? We have been seeing some clarity with respect to Foreign Direct Investment (FDI) regulations, Mergers and Acquisitions (M&A) norms. Do you think that the telecom sector is now getting more exciting for investors, because there was a period of lull that we have seen?

Kaye: One of our great success story, not only in India, but for the firm has been our involvement with Sunil Mittal and Bharti Airtel and probably less relevant for us today directly.

What is interesting that is happening is kind of as Joe was alluding to on the technology side thinking about all of the next generation digital opportunities that flow off of the back of the prevalence of mobile phones and increasingly smartphones around the country.

Q: There was a large deal that had happened recently - Barings Private Equity investing in Hexaware. You have been successful in WNS. You have fair amount of success in tech. What is the next leap that you will take here?

Landy: We are seeing opportunities in some of the software services businesses. It has been at the heart and sole of some of the Indian competitive advantage that we have seen.

Q: Are these mid-sized firms or larger firms in India?

Landy: We have actually found interest in both of them. They are addressing very different kinds of market opportunities.

Chip was referring to the time that we are spending more in the digital domain these days and understanding the applications and what it can do as a next generation play really have us excited.

Kaye: India, in particular, has a really interesting set of opportunities around unique identity project and how that creates a whole another set of opportunities to embed technology in new products and services.

It goes away and it is that second generation or second half the technology revolution that might be particularly interesting.

Q: I want to ask you about retail as well. We saw the FDI clarity coming in, but no foreign retailers have really made a run for Indian currently. Would you at all look at that particular area given the Indian demographics, given the kind of space, given the growth that this area has seen? Would you look at retail and if yes then what part of retail really excites you?

Landy: We have just made an investment in an Indian retailer, Biba Apparels and local retailers as oppose to a foreign retailer coming in we actually think is very well positioned to continue to grow. It has had some explosive growth over the last handful of years.

It has been around for a couple of decades now, but it is doing extremely well and we are excited about where that company can go. We have also looked at a number of food service businesses here in India. So we have looked at a lot and we are very hopeful that more opportunities are going to come our way.

It is something that we are very excited about. As one gets past some of the regulatory issues involved with having foreign owned firms invest in the retail sector.

Kaye: The consumer trend has always been one we have been trying to find a way to play and as Joe alluded to there have clearly been some regulatory issues around foreign ownership and around domestic content and other issues.

The other part is a lot of people also underestimate the competitiveness of the actual Indian domestic retail scene. One of the nice part of our business is we are not sort of the strategic trying to bring our business here, we are actually trying to invest in the local entrepreneur here trying to do something pressure.

In cases like Biba, it is actually opportunity to back somebody here who has an opportunity to find a business and build something interesting over time and that space feels like it is only going to continue and it is clearly a trend we would like to be a big part of.

Q: Owing to currency depreciation, there has been the sense that foreign companies are now making a play for the mid-sized Indian companies across sectors. Is that something that you agree with considering that you have been talking to these companies? You have significant amount of mid-sized companies within your portfolio. Does currency depreciation help you to make these decisions?

Kaye: Our interest tends to be more at middle-sized entities only because that is where they need capital and most of the large scale business houses here tend to have access to capital in different ways.

We would occasionally to do business with them and we tend to build relationships with most of them. The heart and sole of what we do tends to be more as you term it a mid-size player, a new entrepreneur that is looking to build or create something.

Currency depreciation is clearly an element of how we think about risk and reward. We do not delineate it in some special ways. It is part of understanding dynamics of the country. It has been stable for some period of time.

It has gone through the swoon and rebounded a bit. So it is a part of what we think about, but if you are going to take a long view and if you are building a business over a long period of time, the relative ups and downs in the short run are not going to influence decision making.

Q: Going forward is there scope for you to look at an Asia specific fund or an India specific fund or do you stick to your current strategy?

Landy: Our strategy has always been to have one diversified fund. Actually there is some nuance in that strategy that we think is important to understand and it is that when we come to India we are not putting an allocation on India and telling our people you need to go invest this amount of run rate. It would compromise what we believe the opportunity here is for our investors.

Kaye: It actually gives us much better flexibility. You are going to raise a fund and it is so big, then you have got to worry about how big I can have anyone think be relative to size of the capital whereas inside in fund our ability is to be quite flexible.

We can invest early and we can invest often and grow with it over long periods of time and at the same time we can make larger investments where that opportunity exists.

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Q: I want to understand your sense about the Indian valuations currently. There have been issues with respect to the kind of returns that private equity investors have been getting. You peers have been complaining about this as well. Do you feel that valuations in India have now tempered out while negotiating with promoters of a company, while negotiating with entrepreneurs do you feel that valuations and the return on investment has been tempered down now?

Kaye: A lot of people in the financial investing business not just in private equity but broadly they sort of discovered India in that 2004-2005-2006 timeframe after the big run up in 2003 and 2004. Some of that vintage and just after it is probably not going to have proven to be a great vintage in general.

It has coloured a lot of peoples expectations that you are referencing about.

We had a much longer run way and so we have seen both sides of this. Your question is dead on what we have been trying to convey is India is in sort of one of the bottom ends of the mood swing and sentiment is kind of negative.

You hear that palpably here and you hear it in the foreign investment community as well. But as we have sort of been trying to talk about it that is when you can kind of try to find some interesting things to do.

It doesn't mean you don’t understand the nuances or some of the difficulties in the environment. It means you kind of have to look through them a little bit, going forward a bit and recognise that we have seen these cycles before and by virtually having been here for such a long period of time we have experienced both sides of it.

We are not coloured simply by may be having come in at a more difficult time. In many cases the most interesting times to do things in hindsight, the best vintages to have done things tend to be actually when the sentiment may have been the most negative and you have been prepared to kind of swim against the tide a bit, look for that unusual opportunity. 

Q: It almost sounds like finding ray in the dark etc?

Landy: It is. Entrepreneurs they adjust their expectations very sluggishly.

One needs to be very patient, one needs to actually be persistent if you like a sector or you like a particular company one needs to stick with it and over time if there are not other avenues of capital that are available to those entrepreneurs that is when we tend to find the best opportunities.

We can sit down, we can actually talk about growth, talk about financing that growth and it is less about the little changes in valuation and more about where is the business going.