Apax Partners will be looking to invest at least a billion dollars in India over the next four years as the world’s fastest-expanding major economy has emerged as among the top investment destinations for the European private equity major, powering its returns globally.
Buoyed by the ongoing reforms agenda of the Narendra Modi government, favourable demographics, and an uptick in domestic consumption, London-headquartered Apax will also remain committed to backing home-grown growth stories – either leveraging their strong competitive advantage globally or feeding into domestic demand — across the four specialised sectors of technology, healthcare, consumer, and business and financial services with equity capital. It wouldn’t diversify into adjacencies such as debt, or structured credit, unlike many of its bulge-bracket peers such as KKR, Blackstone, or Apollo Global.
“From a global perspective, when we look at India over the last 10 years, it really stands out. India represented 12% of our last $7.5 billion fund (Apax VIII) by way of dollars invested: That’s second only to the US in terms of investments in a single country. I will be disappointed if we do not reach the same figure or even surpass that out of our new $9 billion fund (Apax IX) that we closed last year,” Andrew Sillitoe, the fund’s global Co-Chief Executive Officer, told ET in his first ever interaction with the Indian media.
“We have consciously avoided building a large portfolio of small investments. Each of our investments are sizeable ($100m-$400m ticket size) so that we can provide the right focus and the right level of value-add to our partners,” said Sillitoe (45), a former tech and telco partner at the PE firm before he was elevated to the top job in 2013.
Since opening the Mumbai office in 2007, Apax has deployed $1.5 billion across six investments in India, two of which have been buyouts. It partnered Igate to buyout Patni in one its boldest moves and then sold the combined entity to Capgemini for $4 billion in 2015 — the single-largest deal in the IT sector involving an India-related business. From its first investment in Apollo HospitalsBSE -0.33 %, Apax has always partnered pedigreed Indian entrepreneurs such as the Murugappa Group in CholamandalamBSE 1.01 % Finance, Ajay Piramal in Shriram City Union Finance, and Harsh Goenka in his legacy IT services business Zensar TechnologiesBSE -0.27 %.
But more importantly, unlike the chequered experience of most peers, the returns from India for Apax tops those in comparison to any other emerging markets so far. It has already returned $2.5 billion to its investors from the exits to date (three full and one partial), with average return exceeding three times the dollars invested. According to some estimates, this would be the highest for any fund over the last 10 years with a similar quantum of capital invested.
“I would be disappointed if we dilute the returns going forward. The Indian market is not in a place where we should throw up our hands. There are sovereign wealth funds or pension funds that are going in for a certain asset class – lower returns. This means we have to be selective about the assets, the partners, where we can truly add differentiated value and control the levers to deliver them,” adds Sillitoe, flying in earlier this week to celebrate the fund’s 10th anniversary here.
As a PE firm, growth and not leverage has always been its investment vector.
The team on the ground, led by Partner Shashank Singh, believes there is now far more optimism across India Inc despite the bad-loans overhang in the economy. “Entrepreneurs are more front-footed now. They are more confident of demand growth now and are planning capacity additions as well. Maybe, we are coming through a cyclical bottom of growth and capex. We are noticing far more optimism,” says Singh.
He believes that despite the current buzz about domestic buyout opportunities — in 2007, they were 5% of the PE market by value while in 2016, they were 20-25% — as long as the theme of value add and transformation of business remains consistent, the firm would remain agnostic between minority transactions and takeovers.
“In a buyout, you control your exit. But even in minority investments, we are very clear upfront with our partners about our objectives and are very selective in choosing our partners. In every single deal we have done in India – four minority and two buyouts – we are very clear what our unique value creation plan is. Our partners too know what we bring to the table. When partnerships are more equal and ongoing over the course of an investment, it tends to pan out better,” argues Singh.
Going forward, IT services and pharmaceuticals remain focus areas, even if they are “out of fashion at the moment,” and Indian companies are still globally competitive. The game, according to Apax, is moving from legacy cost arbitrage models to building unique competencies and capabilities. Both Sillitoe and Singh believe it will increasingly be about product development and digital expansion. This is especially relevant when software is disrupting so many industries.
“It’s not a question of a dearth of demand, but where are you pointed? There will be bumps on the road. The US immigration reform only accelerates what was happening in the industry anyway — of a shift in demand from legacy to digital,” says Sillitoe.
Despite the increased regulatory pressure, Indian pharma, too, is an exciting place even though Apax has not done a deal in the space yet. Within financial services, new models of distribution, reaching borrowers, assessing and servicing credit through technology and fintech are the new frontiers and the firm believes digital within the consumer space will only scale up and challenge traditional retail. “We have played this space repeatedly globally. Once the excitement and froth of the early stage investing dies down and companies mature and clear market leaders appear, it will become very exciting and very consistent with our investing themes globally,” says Singh.
But digital is a lot more than e-commerce. He says it still is a little bit early from the perspective of getting to a place where unit economics work and businesses are profitable. “Globally, where ever we have made it work, we need to tick those two boxes.”
“In a buyout, you control your exit. But even in minority investments, we are very clear upfront with our partners about our objectives and are very selective in choosing our partners. In every single deal we have done in India, 4 are minority, 2 are buyouts, we are very clear what our unique value creation plan is. Our partners too know what we bring to the table. When partnerships are more equal and ongoing over the course of an investment, it tends to pan out better,” argues Singh.
Going forward, IT services and pharmaceuticals remain focus areas, even if they are “out of fashion at the moment,” and Indian companies are still globally competitive. The game according to Apax is moving from legacy cost arbitrage models to building unique competencies and capabilities. Both Sillitoe and Singh believe it will increasingly be about product development and digital. This is especially relevant when software is disrupting so many industries.
“It’s not a question of a dearth of demand, but where are you pointed? There will be bumps on the road. The US immigration reform only accelerates what was happening in the industry anyways — of a shift in demand from legacy to digital,” says Sillitoe.
Despite the heightened regulatory pressure, Indian pharma too is an exciting place even though so far Apax has not done a deal in the space. Within financial services, new models of distribution, reaching borrowers, assessing and servicing credit through technology and fintech are the new frontiers and the firm believes digital within the consumer space will only scale up and challenge traditional retail. “We have played this space repeatedly globally. Once the excitement and froth of the early stage investing dies down and companies mature and clear market leaders appear, it will become very exciting and very consistent with our investing themes globally,” says Singh.
But digital is a lot more than e-commerce. He says it still is a little bit early from the perspective of getting to a place where unit economics work and businesses are profitable. “Globally, wherever we have made it work, we need to tick those 2 boxes.”
Source: Economic Times