Q&A with the Founding CEO of Aditya Birla Private Equity
Bharat Banka, the Founding CEO of Aditya Birla Private Equity was picked up by Kumar Mangalam Birla to set up the PE business in 2009 at a time when the industry was besieged by marquee names from abroad. Three years later, the PE has carved a niche for itself based on the core values of the Birla group, ie of integrity and ethics. In his earlier avataar, Banka, 43, who joined the group in 1994, was instrumental in some of the biggest M&As of group in telecom, metals and cement sectors as Head of Group Finance. In an interview with Dev Chatterjee, Banka shares the future plans of ABPE and the recent changes in the industry.
Aditya Birla PE has invested in variety of companies ranging from restaurants to manufacturing companies… what’s your investment strategy?
The investment strategy at the Aditya Birla Private Equity is to build a portfolio of businesses in each fund with a reasonable diversification in terms of risk, returns and exposures. The broad theme remains sector-agnostic as the long-term growth in India is expected to be an all-encompassing one, barring the recent exceptions for some sectors being impacted by discretionary policy and regulatory interventions. Accordingly, our investment managers maintain a fair mix of businesses in manufacturing and services while the core selection of companies hinges upon the potential to generate returns, manifested in the quantum of potential for growth and margin expansion besides presence of ethical and dynamic managements being a hygiene. The icing on the cake would be where our investment managers get to be thought partners with our portfolio companies and benefit them with our networks, competitive intelligence and strategic and business inputs.
What's the rationale for your recent investments in Olive, a restaurant chain? Was it due to the recent listing of other companies in the sector?
The food & beverage industry is estimated to be close to $200 billion and is growing at a steady pace. In the broad Indian consumption theme, F&B (besides apparels) is the one which is huge by size and relatively more predictable in terms of scalability, profitability and potential for institutionalization. Within F&B and hospitality, the restaurants are a good proxy to benefit from the potential of changing paradigms of the consumers on dining. The qualities in the segment that are important and key from an investors’ perspective are strength of brand, brand resilience, institutionalization of the operations and expansion, scalability and profitability. Hence the investment.
Your investors are expecting fair returns in an economy which is showing signs of a slowdown. How do you balance the investors’ expectations and lack of good opportunities?
The returns of any investment portfolio broadly reflects the underlying state of the economy at the macro level and besides that, the delta from the economy returns (i.e. a return over and above the inflation-adjusted rate of corporate growth) in a meaningful way is attributed to the selection of portfolio and businesses that the portfolio has in it. Let’s understand it this way, the returns that a business would have generated in a period of 3-5 years with CAGR of 8%-9% GDP growth would be dissimilar with a scenario where CAGR of GDP growth comes down to 5%-6%. The fair returns in both the scenarios would logically be different and mature investors understand that.
The Aditya Birla PE was set up when the world economies were in a shock and very few companies were investing in new businesses... What are the challenges you faced while setting up the private equity for the group?
Our PE set up about 3 years back, in one of the most volatile times, just after the 2008 meltdown and in an extremely uncertain environment when investors were unsure of committing their capital to long-term asset classes, more so to illiquid alternate assets. One also had to withstand usual resistance relating to a new entrant. However, we were able to set up the practice and raise funds on the back of a combination of strong factors like an extremely respected Aditya Birla Group brand, the credibility built by Aditya Birla Financial Services, an experienced team at Aditya Birla Private Equity with individual investing track records and a product taken to the investors with the highest levels of integrity and customized features.
Many PEs are investing in the high risk and high returns realty sector but your funds are keeping away from investing in real estate sector? What's the rationale??
As per the mandate of both the funds that we manage i.e. Fund I and Sunrise Fund, the focus is sector-agnostic and the charter of these funds requires us to exclude hard assets based plays like real estate. However, the funds is evaluating multiple opportunities in the broader and extended areas relating to these verticals e.g. hospitality, health care, education, infrastructure enablers, clean-tech, etc. which we expect have potential to deliver superior performance as expected by the investors in these funds.
Talking about the industry in general, what's your take on the Indian private equity industry? Do you think the returns have been as good as projections?
The private equity industry in India has a serious vintage of less than a decade i.e. the time since when the international Limited Partners started participating actively in the India dedicated funds launched by the private equity investment managers, whether institutionally sponsored or individually founded by Indian investment managers. Until then, the private equity investing in India manifested itself through global private equity funds investing in India out of their global funds which invested a portion of such funds into India. So, the meaningful action in the industry can arguably be claimed to have started less than 7-8 years’ back. Some of the private equity funds, though smaller in size, with vintage of fund-raising in 2005-06 delivered good returns in high teens and some crossing 20%.
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