Amit Chandra, Chairperson, Bain Capital Private Equity, India, In Conversation With Rtn. Gautam Trivedi
What are your thoughts on the valuations of the Listed Equity markets which, in turn, affects the valuations of the Private markets?
Gautam, you have a much tougher challenge than me being an investor in these frothy markets, it is truly a challenge. And I think putting money to work in private markets is probably even tougher than being in a public market. But not withstanding that I would say money still seems to come in large amounts.
We are in the middle of, I think, the greatest pump priming operations in world history. Never before has so much amount of capital been pumped in by Central Banks on to the major health crisis, i.e. the COVID pandemic. The SENSEX and the NIFTY50 are trading well above their all-time median multiples. So, it is not just absolute highs but also about multiples well above previous highs. Of course, some of this, many people believe, is justified. They think that valuations are somewhat suppressed given that sales growth for companies have been decimated for few years and utilisation levels are still relatively low. But even if you adjust for that it is still a relatively expensive market and it does make it very difficult for many of us to deploy money.
What sectors do you still find attractive today?
Our job is to put money to work. So, we do keep spending time looking for things to do. You would have seen from the newspapers, we are very active, trying to do one of the largest buy-outs in recent times. We do remain very active still scouting for things to do for bottom-up basis but I must say that the last 2-3 years have been one of the most difficult years to put money to work in this market.
I have been in the markets now for three decades and I would say at this point of time it is no different from the past mega-cycles. You know in times like these when things really get rich the best opportunity generally lies in things which people least believe in. I like Financials because banks and the NBFCs are beaten down.
Industrial companies are still suffering because the capital cycle has still not fully recovered and I think there is still opportunity to go and play that selectively. So, I think things where people still have some disbelief is where I think there is some opportunity. There are some segments of the market which are more linked to the global economy where valuations were less frothy. However, even there valuations have started to catch up quite rapidly.
I think the one sector that is making headlines currently is the Indian Tech sector (ex-IT/Software). You saw Zomato listing at a Rs.1 lakh Crore market Cap and PayTM, Nykaa and others in the pipeline. What do you make of that in terms of valuation and more importantly we haven’t seen Bain Capital India being very active in that space?
That is a very fascinating sector. The reason we are not very active in it is many of those companies are still non-profitable companies and we typically invest in what we call the in-stage companies, i.e. companies with well-established and proven business models, some degree of cash flow in them. So, we basically shy away from Tech companies. These companies have done remarkably well and obviously they are great valuations but they still don’t have great cash flow in them.
Firms like us may have missed investing small amounts of money and making large returns, betting that these companies at some point of time in the distant future will be profitable. But its very difficult to crystal ball gaze and say that they will do so on the basis of cash flow vs. revenue growth. In company after company, there hasn’t been translation of revenue to cash flow. So folks like us still make money the traditional way based on solid fundamentals that we can analyze and value. There is a segment of the market which does it very differently, with different metrics, they look at things like revenue to market cap and other fancy metrics like customer multiples and things like that.
It is like some people speak Sanskrit and some people speak Hindi. You can understand some of the words but you can’t understand all of the words. Not to say one is better than the other. So, we don’t understand the language but we now really have to keep an eye out for many of these companies because they disrupt the operations of companies that we invest in. Hence, you got to be very careful if any of these disrupters are in your eco-system. Then you have to factor that in as to how they are going to share and impact the profitability of the companies in the ecosystem that you work in.
The comparison of India and China is inevitable. The recent crackdown by the Chinese government on their Tech companies was totally unexpected. Global Private Equity funds, Venture Capital funds and Institutional investors have lost over US$1.3 Trillion in valuation. Do you think that will move the focus on India ? And I don’t mean just tech perspective but overall ? Do you think you will see more money coming into India as a result?
Yes and No. We are unfortunately a dwarf compared to Chinese ecosystem. They are miles ahead of us. That is the reality and they are ahead of us in terms of technology, ecosystem, capital access…..everything. Whatever happens in China happens for a reason and they are obviously doing this because they want to exercise much better control over their players. It will have some ramifications but does it mean there will be a complete pivot to India?
I think it will create an opportunity for us but I don’t think it will create a pivot towards India. We should seek that opportunity and make the most of it but I think if we miss it, it will disappear very quickly. But will this mean that people will stop investing in China and start investing here? No, because China is just such a huge ecosystem, I don’t think people can ignore the opportunity there. I really think India should make the most of what is happening there.
What are your thoughts on the recently launched Production Linked Incentive (PLI) scheme ? This morning you must have read about the Government of India (GOI)’s Asset Monetization plan. Do you think this is something that global Sovereign Wealth Funds (SWFs) would be interested in investing?
I think the PLI scheme is really a great scheme. I think it has come late but it is highly welcome and wish it would have come earlier, it would have created a lot of opportunities in a lot of areas. I don’t know if it will work in all 14 areas but even if it works in half of them, I think it is important to create replication in other areas which is what we need. We need examples of change that can be easily replicated in other areas. I think, as we know, the devil in India is always in the details. So, it is very early to say. Gautam, you and I have seen disinvestment announcements, budget after budget for the last 20 budgets, the conversion ratio of disinvestments has been abysmal. Will this actually be yet another example of that? I don’t know. One always hopes that the GOI realises more from the Asset Monetizations than it has through disinvestments. The GOI is the largest owner of these assets in the country. All of us on this call effectively earn nothing for all the assets we have paid for (via Taxes), while the GOI gas high indebtedness. Therefore, we actually have negative carry. It makes sense for the GOI to do Asset Monetization, because every year they don’t do this, it is a lost opportunity.
Due to COVID, most people are working from home (WFH), some are coming to offices twice a week while others are actually working remotely. Some people actually thought of retiring and going to Dehradun but now they are able to work from there. How do you think that is impacting the entire ecosystem ? Are you right now at home or some exotic location?
I just got back from Dehradun yesterday. I have both my offices open and I go to the offices often. I do believe that if one maintains a safe protocol, we can have our offices open. I think there is absolutely no substitute to being able to have some degree of interface with our members. I think otherwise this whole work from home concept is highly overrated. I think we will ultimately have to go to some kind of hybrid model where we can work remotely to some extent and work from the office.
There is some merit to WFH but I think otherwise we will have culturally bereft organizations with very weak team dynamics. In customer centric businesses we will simply not be able to look at customers in the eye and have good customer centricity if we aren’t able to meet our them and our colleagues, travel, etc. Also I do believe that we need to travel for leisure. I have done 7 trips since the lockdown. I think it is important to travel both for work and leisure and to office at least a few times in the week but not at the expense of safe protocols. I have very well-established protocols whether it is vaccination or testing.
What are your thoughts on global private equity funds looking at India ? Where do they see India now vis-à-vis the other countries ? Are you seeing India in the top 3 in terms of attention, investment, money flowing in?
I won’t say top 3. India has always been an important market for the last 10 years. India, for most funds, is basically between 5-15% of the assets if we look at total assets. This makes it a reasonably important market and the number is growing. The average India allocation is closer to 10%, which relative to total assets in management is higher than average. So, that makes it an important market for anyone and certainly in Asia it is among the top 3 markets.
Japan, China and India are top 3 markets for anyone. If you look at the US and Europe and then the big markets in Asia, India is among the top 5 or 6. The good news over the last 10 years is prior to 2008 India didn’t deliver meaningful returns. I think post 2008 private markets in India have provided very good returns. The well-established PE investors in India have delivered double digit returns and have successfully returned capital back to investors.
You are right it is not just returns, it is superior US Dollar returns. Last year in February, I attended a lunch in Mumbai with the Global Chairman of Blackstone, Stephen Schwarzman, and he said India by far has been the best market for them, including the USA.
Blackstone has been a phenomenal story. For them India is the best market globally. For us Japan is our best market.
With respect to disruptive technologies, we have seen investments pour into Solar, Wind, Electric vehicles (EV) and now Hydrogen. What are your thoughts on these disruptive technologies?
It is not a theme that we have focused on. Usually there are two sets of investors that look at this. One are the early-stage investors because often these are areas that VCs tend to focus on. Post that it is the infrastructure or the green investors. The exception is in highly stable situations like markets in Japan we have actually done wind platforms. Bain Capital owns the third largest wind platform in Japan called JWD. It is very rare in markets like China, India and US, where you rarely get an opportunity to earn 20-25% return.
This area is interesting, the PM also talked a lot about Hydrogen. Even in wind suddenly you are seeing deep sea hydro-turbines. So, we are actually seeing fairly interesting developments which we are tracking. Due to climate change these are going to be interesting areas.
Is Environment, Social and Governance [ESG] a fad or it is here to stay because I am seeing this increasingly with venture capital, private equity funds and Institutional investors adapting this?
ESG is actually a mega trend. The single most important thing that folks want to focus on in investment is ESG, whether in the public markets or private markets. It is the one thing you have to really pay a lot of attention to, especially if you are in public markets. If you land up investing in a company which isn’t paying attention to ESG, you will see valuations crash and burn.
On the other hand, the companies doing a good job could see premium to it in longer term. For example, how Infosys focussed on ESG and started trading at premium in the initial years. Similarly, HDFC was again a good example of that but this is a mega trend. The leading pension funds of the world start to ultimately drive this and putting metrics to ESG. Ultimately you will see money getting pulled out from companies who have more pollution or less women employed or have bad supply chains. You will start seeing more and more of this. What used to be regarded as activist behaviour will be seen as mainstream. This is the single most things that investors want to or should want to focus on. Even as private investors when we invest, we have teams that think very hard about what the ESG characteristics of the company are. This is because when we want to sell it 3-5 years from now, ESG is going to be a very critical card in the selling pitch.
We have noticed over last 4-5 years global private equity funds are increasingly coming and buying out promoter stakes in listed Mid-Cap companies. What do you think of this trend and why do you think is this happening?
So, I am not surprised of the trend. I used to be a banker 15 years ago and even then we used to talk about that this will happen at some point of time. At that time it was a little slur to go to an Indian family and talk about selling their companies. The ones who sold we used to call them progressive, most were offended when we used to go and make pitches to them.
But today it is almost as if the whole clock has turned 360 degrees; it is becoming fashionable to sell. In those days they sold more as a last resort. Today I think many families are selling because the next generation is actually very clear that they don’t want to run the businesses. Two things have happened, one the next generation is so clear about their preferences they want to do something else. For example, they want to run an art gallery, a restaurant or just travel the world. So, they are clear.
In some cases, the founding family’s father or mother are clear that the next generation is not competent to do what I did. In the past, where they forced the children to take on their business irrespective of their competency, now they are not trusting the business on incompetent successors. That was actually what we saw in many cases 10-15 years ago. Good businesses actually getting decimated by incompetent successors. Now what people prefer just selling the business, giving shareholders the cash and moving on. As a result, today you are seeing lot more businesses changing hands with rapid succession.
That is one part of the story. There are lot more dialogues to move the businesses, in many cases the children tell the parents to sell it and in some cases, the parents tell the children that they are selling. So, that is why there is a big spurt in buy-out activities in the last five years.
The reason why the buy-outs have happened from promoter to PE and not from promoter to strategic is two: one is in the last 5-6 years global strategic investors have in many cases disappeared. They have instead started focussing on their backyard. After the global financial crisis (2018), many cases the strategic investors were busy in their respective countries and solving their own problems. PE funds, on the other hand, have mushroomed all over the world, in markets like India, Japan, China & Europe. So, every major country in the world, has at least 10 are strong private equity players. The private equity players are large teams. So, they have confidence that they can go and buy in sectors of their choices that operate these companies. And so, they were able to compete with many of the strategic players and build assets and operate them.
After you have seen a few transactions happen and those transactions went well, one thing led to another. That is the reason why you see proliferation of these deals. As you know lots of these deals have actually done well. In many cases, the company has actually done remarkably well under private equity ownership. Sales have grown faster, margins have expanded and valuation have doubled/ tripled. And so, this encouraged other PE funds to add more capital to such situations. I think that is the main reason why more capital has come in in the last five years.
ROTARIANS ASK
You said you rely on cash flows to evaluate the companies, could you throw insight on the start-ups like Zomato who raised such a huge amount and their cash flows will be very difficult to predict ? And secondly while in India we have big market size but the quality of market size is not what we desire. Take for example, the recent Cairn Energy issue and so many other telecom companies.
I am not really confident on commenting on the Zomato question. It is a very different world with these consumer tech companies. Those companies trade on very different basis, they trade on basis of future cash flows and in many cases the future cash flows can be 5-6 years away. And you can change on an excel spread sheet two or three variables by a small amount and the answer can change massively. So, it is very tough to answer that question. I find it very hard to explain the valuation of these companies and I have been wrong on that count. Many of these companies have done phenomenally well but just because they have done well doesn’t mean you can explain it.
Your point on policy framework is absolutely correct. If you look at the Indian policy frame-work, I think even the government recognises it leaves a lot to be desired and I think they are themselves working on providing greater stabilities. The recent reversal of the Retro tax was a very welcome move in that direction. I think the government sometimes needs to be pushed to do certain things. We are nation where we are a noisy but an imperfect democracy but sometimes, we only learn from our mistakes and I think my hope is that some of these mistakes will emerge some positives. There is a lot of imperfection in what we do and there is lots of improvement which are needed.
How do you manage the competitive world of finance and the world of philanthropy which is so sensitive and empathetic?
I would not be able to work in the world of finance if it was not working in the world of social sector to be honest. I think it is the social sector that at least encourages me to get up and do what I do in the corporate world because at least I have sense of purpose and some kind of reason to keep making money. So, I think the sense of purpose comes from there. The fact is everyone needs purpose. So, that is my sense of purpose.
What are your views of cryptocurrency?
I generally don’t like to comment on things that I don’t generally practice of follow. It is not an area I have ever traded in or transacted in. Honestly, I have less knowledge about it. It is also an area that is not very well regulated and I do worry about, till it comes under a reasonably well-regulated ambit including how well it is tracked, how well can you have checks and balances in it. I worry whether people should have reasonable exposures to it or whether it should just be something which is experimental.
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