May invest $3bn over 3 years in India: Bain Capital

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

Q: There is a lot of excitement in the run up to the Budget. There has been some sense that the reform cycle has picked up now. There is some amount of excitement with respect to investment outlook. How significant was the Budget in probably reviving or assuring investors? Chandra: I think the Budget in itself, the problem was that there was too much over excitement and anticipation. However, if you take that away, in my view the Budget did exactly what it should have. It provided some continuity to the broader agenda that the government has been seeking to put in place. It provided comfort on the tax side on a number of key issues and very importantly at this point of time the economy needs to be kick started with some public spending. He did a good balancing act in terms of bringing down the fiscal deficit target yet allocating enhanced capital for public spending. From my perspective it was not a disappointment at all. I think it was a very good Budget, if anything that is disappointing it is actually people’s impatience and expectations are things should miraculously happen. I am actually very bullish and we are on the right path but that we will have to see the real uptick come through in 2016 and 2017. Q: Most investors believe that we need to give the government some time in increasing investment pace in making India a country where ease of doing business seems to be topmost on everyone’s agenda. What according to you are the bottleneck’s that needs to be addressed immediately? Singh: There is depending on where you look in the economy different bottlenecks, so the big one in terms of public spending, on infrastructure and getting the investment cycle restarted.

There were some policy level issues, coal auction was one thing that they did, telecom obviously slightly different, but that is another issue they have been addressing. Then there are on the ground issues in terms of land acquisitions, in terms of approvals etc, all of which I think the government is slowly is addressing each one. It is hard to do everything in a big bang way which from a pure perspective works but practically it is more difficult so those bottlenecks are being addressed. The other interesting thing which the government has done by pushing a lot this spend actually to the states, it has given them more ownership of the projects. If you look at a lot of where these bottlenecks come up it is actually at the state level. It is hard for the government from the centre to clear all the hurdles that you need for lot these large infrastructure and capital projects. So where the new Financial Commission moving more of the expenditure to the states that will go a long way in clearing the path. If we look at the investment community clearly one of, I would not call the bottleneck but tax is also been an issue. The government at least from a tenure perspective has started moving towards clarity by inconsistency. So things like General Anti-Avoidance Rule (GAAR) they didn’t just kick the bucket down to two years they also said look we will grant further all the investments. So thing you do toady even if you exit 5 years from now you do not have to worry about GAAR. That is a significant improvement from where we were before where there was deferral where you did not know whether sure if I exit an investment this year GAAR would not imply but what about new investments.

So things like that are significant they have clarified rules around. Indian assets that are owned off shore, those transfers there were issue about minimum alternate tax (MAT). So all of these the government is as Amit has said it is not a big bang type of things but they have taken all the right steps on various levels to start getting the machinery working again so that the capex cycle can restart, the investment cycle can be started.

Q: The new government of course has set the ball rolling rather. How is Bain Capital now looking at India differently than it did about a year ago or is it looking at India differently? Chandra: I would definitely say that we are far more bullish about India today than we were two years ago. As you know Bain Capital has been a very major contributor to private equity (PE) deployment in this country.

Over the last four years if you look at our commitments to companies based in India as well as companies outside India of India who have substantial operations in India we have committed to close to USD 1.3 billion which outside a real estate probably makes us the biggest deployer of private capital in the last four years.

It is interesting to note that, most of that came in the first two years and in the last two years we have only been able to commit a USD 110 million to one company so things definitely slowed down for us as it did for the rest of the industry. A lot of what was happening in the Indian macro both dampened our spirits and also substantially reduced opportunity because the investment cycle got broken and our industry is substantially dependant on fresh investments to be able to deploy capital. I think all of that is changing but we have got to be patient.

We will feel that change a lot more in 2016 and 2017 than we will in 2015. We will see an improvement of sentiment in 2015 which will undoubtedly result in more deployment of capital than we did in 2014. However, let us not forget private equity is deploying about half the capital again if you strip out real estate than it was at its peak. In economy that has grown substantially since that peak was seen so there is big opportunity for private equity to deploy a lot more capital in India. As one of the leaders in this space I do not see any reason why we would not be at the forefront of that movement.

Q: Can we then say the USD 1.3 billion that you have invested so far going ahead in a 3-4 year timeframe would you be able to beat that investment perhaps even double it? Singh: We typically shoot for 3 times recent, we would love to, so as we think about investment in India and one of the unique things about our fund is the largest investors are actually the employees of Bain Capital. So if we can find great opportunities to invest USD 3 billion of capital in India within the next few years I think we would be delighted to that.

Would I say that is a very high probability outcome I do not know? However, as we think about our footprint in Asia and be invested out of the Asian fund it is where we find the best opportunity across the region. In the last few years as Amit has said on an absolute basis but also on relative basis it is been challenging to say that India should be the right destination. If nothing else the currency has taken such a big hit on returns for investors. Look India fundamentally is a growth investing market, hard to do that if there is no growth or there is slow growth.

We have been fortunate to have a good market share in the markets especially of larger deals which is where we would continue to look to focus and so my hope is when we have this conversation a few years that we will above that number or double that number.

Q: There have been two Asia focus funds so far there have been reports that there is another one upcoming. Firstly, the last funds that you raised USD 2.3 billion if I am correct what was the exposure of that to India and going forward now that you would perhaps look at raising a larger fund is there a deployment or a percentage that you would like to keep to India or would that be on as and when basis. Chandra: We are essentially macro allocators of capital. Capital for players like us flows to where we see the best opportunity. To the point that Pawan Singh was rightly making if you look at the last four years a little around the third of our capital deployed in Asia found its way either into India or into companies that have reasonable operations in India. In the last two years that number dipped below 10 percent.

That was reflective of the fact that firm like us was finding better opportunities in other markets then we were because the availability of capital has not been issue for players like us. I see no reason at this point of time looking at what is happening in the rest of Asia and looking at India’s prospects that we do not have an opportunity to substantially enhance the amount of capital that comes here both on an absolute basis and on a relative basis to the last two years.

Q: In the next say three to four years what do think would be the preferred sectors? PE players typically stick to IT, consumer-- the safer sectors so to speak. Would you also look at infrastructure; I won’t say real estate but infra, power and so on? Singh: Some of the perennials that you have named will continue to be important so the one that probably did not make your list but should be is financial services. So, if you look at an economy that is going to grow hopefully the way India is going to grow then financial services is the sector that will need capital and that will grow at a multiple of that numbers. Financial services will continue to be an important area of investments especially given what is happening with the public sector banks and at the pace at which they can fund their own growth relative to overall credit growth in the economy, there will be a big opportunity for private banks or NBFC’s etc. Consumer retail gets a lot of brass but if we actually look at deployment, it has not been that large a part of deployment. Part of the reason, obviously is there is some restrictions in multi-brand retail, part of it is those are very cash generative businesses so they do not often need primary capital from outside but it will be an area of interest and hopefully we will see more deployment than it has.

Another sector that has seen a lot of activity and will continue to see is healthcare both on the services side whether it is hospitals or outpatient care etc. as well as on the pharmaceutical side. On the pharma side my guess is it is probably still again, less primary’s and more secondary’s. IT services, clearly BPO will continue to be an active space. For us industrials continues to be very important, it is one of our top three verticals globally. Q: Would you say defence and telecom are interesting? It did not make Pawan’s list. Chandra: Core telecom in itself probably does not present an opportunity at this point of time purely because if you look at the structure of the industry, it has got well defined; it does not need growth capital. Most of the firms now are self-financing; there will be some segments of telecom where there will be innovation that will need to be funded which the early stage firms will probably do, there maybe some other segments where a special situations might arise but by and large the telecom industry is unlikely to be one that will require a lot of capital from the private equity industry.

Defence to a large extent falls little bit into what Pawan talked about which is industrials. There is a big opportunity in defence. What this government is doing with moving defence manufacturing on-shore is actually going to be transformational so, defence is going to be a very interesting story but it is going to create some spin-offs from it which will take a little longer to be actionable but I would say very broadly at this point in time I feel industrials in general is going to be a very interesting opportunity over the next five years.

Singh: The one other area which maybe indicates a bit of our history and bias which obviously has seen a lot of investment and will see is technology, internet. So, if you look at this past year almost half of all capital deployed, close to half is actually been in tech. Now a lot of that disproportionately gone to Flipkart and Snapdeal and five companies but that is the space that would continue to see probably an accelerated amount of activity. Q: Are you looking at e-commerce then in that case? Any e-commerce deals that could be on the annual?

Singh: I would say we have spent some time there but nothing that we have gotten close to.

Q: I sense there is a conversation underway there. Let me ask you about your IT portfolio. Genpact was one of the largest deals we have seen in the IT space from the PE industry. Going ahead what is your outlook like on Genpact, would you maybe look at now or is it time now to look at exiting the investment or would you look at a larger timeframe of over because it has just been about three to four years if I am correct?

Chandra: Yes, we are little over two years from the Genpact investment and as you could see from the stock price, it is not just being one of the largest investments in a company which has reasonable operation in India but it has also been highly successful.

It has been a great performer for us and we think that the story in Genpact is just begun but as I said it is still a relatively young investment for us so I do not think we have started thinking about monetization at this point of time but it is one that has encouraged us to think more broadly about what more can be done in the IT enabled space with both companies in it, India as well as companies who have some India-centricity to it. Q: Would you then look at hiking stake in Genpact? Chandra: Nothing on at the moment. Singh: But we indirectly have… Chandra: Well, because there was a buy-back that we did not participate in. Singh: So, the company did a buy-back, fairly significant buy-back where we did not participate so indirectly we did increase our stake. Q: The other investment that was watched very keenly when the deal was done was Hero. I remember, I was tracking the deal very closely, there were some 6-7 private equity (PE) players that were named and then it was narrowed down, so on and so forth. How has the Hero investment panned out so far? What is the road ahead because I believe there has been a gradual exit from both Bain as well as GIC? Would you now look at exiting that completely and may be deploying that in other sectors? Singh: Hero has been a great partnership for us. We really had a great journey with the Munjals in taking a business that was so closely tied with Honda and its history and really making it a great stand-alone business in a really Indian home-grown success story if you will. If the question was just from a financial perspective, the deal for us we have been very happy with the outcome.

The stock has roughly doubled more than when we came in, in a three year period. We have some stakes still left. I think more important than that we had a commitment with the family on the journey that we would take with them and the partnership we would have for them and so we are still involved fairly actively with the business. And, it will be a joint decision with family when we look to exit. Given the quantum of the stake now is small I would think it is sometime in the near to medium-term future. Q: Last question to you two. I always get the same answer from every PE player I speak to but I will still try. In the larger 3-4 timeframe, we already spoke to Pavan about it, but roughly what is the kind of investment that you would be willing to put into India from a broad point of view? And, in one line where is the India story headed? Chandra: The India story has a great future. The India story will rebound substantially. The private equity industry will be at the fore front of that rebound. I would not be surprised if the industry grows at a very rapid rate and claws back lot of the lost ground over the last 4-5 years. And I would be very disappointed if we were not at the fore front of that claw back. Q: Where will India stack up? Now that there is some kind of clarity from the government’s side and hopefully policy uncertainty may not be an issue for investors, where will India stack up versus emerging geographies, versus even the developed world for that matter, in the next 3-4 years? Singh: India has the potential to be one of the top destinations and the top performing economies. I mean, even if you look at barring the last few years, but before that when we were growing at 7-9 percent, we and China, we are really the only two economies of that scale at that pace. China, there has been a lot said about a slow down etc. Part of that is natural, an economy reaching that scale, that growing at a high pace for that period. We have the potential to grow faster. And, at our scale that would be a unique story globally. It should attract a lot of investment and as Amit said, hopefully it will be at the fore front of that.