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Believe in India growth story; PE a long-term play in the country: Charles Kaye & Joseph Landy, Warburg Pincus

Satish John & Brian Carvalho, Mumbai, The Economic Times

January 13, 2012

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They are a rare breed. As heads of a bulge-bracket private equity firm, they are veteran India watchers closely tracking what's happening on the ground for the past 17 years. Charles (Chip) R Kaye and Joseph (Joe) Landy, co-presidents of Warburg Pincus, are on their umpteenth India visit.

"India goes through certain mood swings. You can almost fly here and get a sense. The reality is that life's neither as good at the top nor as bad at the bottom of the swings," Kaye said in a rare interview.

Like the founders John Vogelstein and Lionel Pincus, the current co-heads prefer to let the firm's investment returns do the talking. "If you pick any time frame - five years, 10 years - we have generated 1,000 basis points (10%) better than the underlying markets," says Landy.

The current climate for investing is, however, challenging globally and in India, what with targets, exits and returns in short supply. Kaye and Landy are no strangers to such subdued times. "Some of our best investments have tended to be in situations that were perceived to be hard," Kaye says.

In the past 18 months, the firm has invested close to $500 million in India. That's significant since Warburg has invested $3 billion in the past 15 years. The pipeline is currently pregnant with two deals. Warburg is part of PE folklore in India for the killing it made in Bharti where its return was almost six times its original investment of $300 million.

Another Bharti is unlikely soon, but Warburg is busy doing what it knows best -taking a few calculated exposures in India. For instance, it is helping Alliance Tires - an off-highway tyre maker promoted by Yogesh Mahansaria, a former CEO of Balkrishna Tyres - build a global operation from scratch.

Kaye and Landy have been together for over 25 years. When Kaye exchanged visiting cards with this writer, Landy realised he had run out of cards. Without hesitation, he scrawled his name below his partner's on the card and said with a grin: "Everything else is more or less the same."

Returns are meagre, exits are rare, as are targets. What are your views on the investment climate in India for private equity firms?

Charles Kaye: We've been following India for the past 17 or 18 years. I've often argued that India goes through certain mood swings. You can almost fly here and get a sense. I think the reality is that life's not so good at the top nor as bad at the bottom of the swings.

We've been long believers in serving the secular India growth story. At the same time, there's no doubt there is a set of issues that India is grappling with. Some of them relate to the international scene. The past year has been unusual throughout the world.

India has suffered to some degree, giving its need for external capital. But there are some domestic set of issues India is grappling with.

Joseph Landy: It may be more challenging for liquidity and returns today. One of the great things that private equity can bring to markets like India is the long-term time horizon where you are not measured by returns over a small time frame.

What has been your experience in India so far?

CK: In the past 10 years, we have invested $3 billion in 30 transactions. That is $100 million on an average. It can be from $30 million to $300 million for any investment.

We've invested a few billion dollars ($3 billion) and we've done very well. We've been here not just during the ups but also during the downs and you often tend to say you find friends when the times are bad and not when times are good.

The question is who'll have the fortitude and strength to stay here and work through the inevitable difficulties and take advantage of these moments in order to build longer-term success. We have built our reputation over 45 years as a firm that sticks around during difficult times.

How do you compare today with 10 years ago? Things were rather innocent back then and rather undervalued.

JL: Times change and so does the nature of opportunities. There is more money in the market and more players. So, one has to be innovative in what you are looking to do and it's one of the reasons why we are so bent on making deepdomain investment that is knowledgebased. So, we invest behind those industries that we know well, whether it is infrastructure, healthcare, financial services or industrial.

CK: If you go back to the latter part of the 90s, there was some amount of discovery in India. When we were first here in 1995, India wasn't on anybody's radar screen at all.

So, there was an opportunity at times to acquire stakes of public entities at very attractive prices and at very high rates of growth. There was also an opportunity to provide capital to entrepreneurs who did not have access to it.

We found success in both. In the first category would be companies like HDFC, Ambuja Cements and Nicholas Piramal. And in the second category would be companies like Bharti Airtel. All of those played out very well.

What is the opportunity today?

CK: There is an opportunity to create new entities, particularly in the infrastructure space. So, we have invested in building a deep-water port in Andhra Pradesh; in IMC which is building liquid storage infrastructure; and Diligent, which is in the power space.

India has a deficit in number of those areas. If you look at the consumer space, the creation of entities such as Lemon Tree Hotels, which has come from nothing to be a firm that is probably the fourth-largest hotel chain in aggregate.

We even have an unusual story like Alliance Tire, which started from scratch by acquiring a platform entity in Israel, building a Greenfield capacity in India and acquiring a distribution business in the US. Over a handful of years, we have built a half-abillion dollar global player in the tyre business.

How successful have you been in adding value in India by working with management teams?

JL: What's the role of a private equity firm: It's everything from financier to headhunter to psychologist. We have an advantage in that. We have worked with 600-700 companies over the years. That experience is what we bring to the party.

You also came around at a time when there weren't too many competitors. Are there too many firms chasing few deals?

CK: I think it's hard to make an assessment that you are successful as an investor in a market of one. It doesn't make any sense. It was inherently always going to be more competitive. I can say the same thing (that there are too many PE players) about newspapers, the TV channels business. The investing business is different. In that, it is not a market share business. There is not a defined universe of available transactable deals .We have to create investment ideas out of the air.

You've been working together for more than 25 years? How do you resolve contentious differences?

JL: We sit down and resolve differences. We have our strengths and weaknesses. We don't make rash decisions. Over time we've learnt to work with each other's styles. How we go from here to there is what we talk frequently.

CK: We have 60 partners around the world. We still run as a private partnership. That's one of our strengths to have a globally-integrated partnership. We all have the exactly the same incentive structure.

Telecom and cement are too fragmented. Is there an opportunity to consolidate?

CK: The telecom story, and the Bharti story, has been well written. Our association with Sunil Mittal is something we are very proud of. We did well as an investor and it is a positive example of good governance agenda.

That sector is going through a fair amount of turbulence. That space is more likely over time to be consolidated among the existing players and create opportunities for big players. In cement, there are some under-managed assets that interest us.

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