When Warburg Pincus, the New York City-based global private equity fund, invested $293 million in mobile phone services firm Bharti Tele-Ventures between 1999 and 2001, the private equity world was taken aback. Warburg Pincus has investments of $20 billion in 525 companies across 30 countries, but for the firm to invest so heavily in a little-known (at least to outsiders) telecom venture halfway across the globe seemed like a highly risky move. Last year, Warburg Pincus proved the skeptics wrong when it exited from Bharti Tele-Ventures and netted more than $1 billion on the deal. What’s next on the firm’s agenda? India Knowledge at Wharton spoke with Charles R. “Chip” Kaye, co-president of Warburg Pincus, about which sectors of the Indian market he finds attractive, why opportunities in China and India are not as different as people think, and what he sees in the near term for Indian private equity.
India Knowledge at Wharton: Everyone wants to know what the next windfall might be. Looking ahead, in which sectors do you see the greatest opportunities for private equity investment in India and China?
Kaye: The “China for manufacturing, India for services” story is not real. The services story may have created Brand India, but India is competitive in a number of sectors in the manufacturing space, including automotive and high-tech manufacturing. You will begin to see more stories like that of Tata Motors and its mission to build a Rs. 1 lakh [$2,175] car. India can take advantage of its highly educated work force and compete well in value-added, engineering-driven manufacturing sectors, though maybe not as much in long-production manufacturing [products with long production pipelines and relatively high inventories].
Infrastructure is also a huge area for growth — roads, power, ports and airports — as is real estate. The demand for residential buildings, hotels, office space and commercial property is high. Construction and building products, of course, will go along with all that. Keep in mind that real estate, construction and infrastructure are huge labor absorbers, unlike information technology, which does not employ quite so many people.
India Knowledge at Wharton: What is preventing investment from happening at a faster pace?
Kaye: India changed course some 15 years ago. Not a lot of people in the West noticed it earlier. Now, CEOs and boards of every company are all asking the India question — “Should we be there?” Still, the country has its challenges. Its infrastructure, broadly defined, is lagging behind. Roads, airports, etc., are just beginning to improve, but other areas like power have not yet been adequately addressed. There are supply-chain issues. The bureaucratic and regulatory environment seems complicated.
Going there and being comfortable with it — learning about the place — makes a big difference in determining how quickly investment occurs. We have been there for a decade. We have 15 professionals in Mumbai who put in the time and effort to make things happen. We partner with Indian entities, helping them create alliances with multinational companies.
India Knowledge at Wharton: What is happening in China?
Kaye: While India and China are not going to carve out the market based on which one will do one thing and which the other, their stories will play out differently. China’s story started in 1978, when state-directed economic policy led to its now rapid development. It also has higher savings rates and, hence, higher rates of investment, both of which are in the mid-40s. It has always been easy for multinational corporations to establish joint ventures or wholly owned operations in China — either for exported goods or domestic consumption. However, it is much harder for investors to put money into Chinese companies, so foreign investment in them has been more latent.
In the first 10 years, China invested in technology and the Internet — for example, in portals like Sina.com. In the last couple of years, you have seen investments in state-owned companies like Harbin Pharmaceutical Group. Foreign investors are now partnering with first-generation entrepreneurs who have built businesses of real scale and now need to clean up some of their financial structures. An example is GOME, which started 19 years ago but is a 400-plus-store chain today — the largest Chinese consumer electronics chain. Similarly, look at Intime in the department store sector. This is the first chance outsiders have had to invest in these companies.
Real estate is also clearly a very interesting space in China. Consumption is going up as markets get richer and China is moving up the income curve quite rapidly. Mass affordable housing in Guangzhou and Beijing is hot. The Sunshine Group in Chengdu, and Raycon, the real estate arm of Legend Group, are big players.
India Knowledge at Wharton: Do you see any Indian winners you can talk about?
Kaye: We are investing in a number of areas — among them are real estate businesses and IT office park space. In media, we are investing in Writers & Publishers [the Ahmedabad-based parent company of Dainik Bhaskar and Divya Bhaskar, which publishes 18 dailies in Hindi and Gujarati].
We are also putting money into Vaibhav Gems in Jaipur, which makes jewelry for the mass market. Its products are featured on home shopping channels both in Europe and the U.S. Another investment is in Aryan Coal [of New Delhi], which is in the business of chemically treating recently-mined coal more efficiently.
India Knowledge at Wharton: How much of a hands-on approach do you take with your investments? How do you typically manage them?
Kaye: Warburg Pincus functions as a truly global firm, with a single pool of capital and global partners. We have people on the ground who know what is happening from day to day at the companies in which we invest. At the end of the day, of course, the firms are only as good as the individuals in them.
India Knowledge at Wharton: What are the risks of investing in India or China today, and how does your company minimize and/or manage them?
Kaye: There are indeed many macroeconomic risks in India, but we feel they are manageable, as we have been there for so many years. Everyone looks at Bharti as an example, but if I lined up the facts today as they were then, most people would not invest. Bharti had far fewer financial resources than many other global telecom entities. Most of our dollars went in right after India’s nuclear test. But we had a strong feeling about Sunil Mittal [chairman of Bharti Tele-Ventures] and the decision of the government to get out of the telecom space.
In private equity, you have to look at the context of things and live through events. Talking about politics is an art form — after all, every major party in India is essentially committed to liberalizing the market economy. You can debate its pace or the specific reforms, but everyone agrees on the general direction.
In China, no one can argue that a radical change is definitely not going to happen. If you look at South Korea and Taiwan, you see transitions from autocratic to democratic forms of government. Sometimes people do not understand the degree of accountability the Chinese government has created for itself — oddly, it is one of the most accountable. People are rewarded and punished based on merit. So it is not clear whether change has to be disruptive in China.
Over the long haul, Asian currencies, I think, are naturally appreciating, though at what pace and over what exact timeframe I do not know. It is good for China to have an appreciating currency. It makes living standards better.
India Knowledge at Wharton: What kind of investment-to-exit timelines are you looking at?
Kaye: In this business we look at five- to 10-year increments. On average, our investments are in the five-to seven-year range, although sometimes we are in it for a decade. But many firms have shorter time horizons. Everyone has a different way of looking at their rates of return and multiples.
India Knowledge at Wharton: Suppose you were talking to an Indian entrepreneur who is seeking private equity investment. What advice would you give him?
Kaye: The most important things for us are the integrity and reputation of the entrepreneur. We look for someone who has been successful and who has the professional standards and the reputation that any PE firm looks for. We look at being a value-added financial partner to management. It is not just about academic credentials, either. We spend time understanding how they have dealt with investors, employees, customers, etc., as well as others. I do not let a degree from a top business school or political connections count for more than what they are.
My advice to the entrepreneur? Be clear about what you want. Some founders find that they don’t really want a significant single investor, since they view that as interfering with their business.
