With 30 years of investing experience, US-based private equity (PE) major Apax Partners has made investments worth $40 billion around the world. The firm, which invests through its latest $15-billion global fund, had started its Indian operations in 2006. However, the fund made only two investments in the past six years in India. Shashank Singh, co-head and managing director of Apax Partners India, speaks to Reghu Balakrishnan on why the company went slow in India and the rationale behind its selective investments in the past. Edited excerpts:
Apax Partners has made only two deals since it started Indian operation six years ago. What is your investment strategy? Apax focuses on larger deals in our sectors. Having said that, we prefer quality over quantity. We prefer buyout transactions, of course, but we will also go for significant minority stakes in good quality companies.
For example, our deal to acquire Patni Computers. It was a buyout of a $700 million revenue company (Patni) by a $300 million revenue company (iGATE), with support from Apax. It was a transformational deal for iGATE, which it couldn't do on its own. iGATE raised $1.5 billion worth of capital, and Apax invested $300-400 million. It was a large and complex deal, and we worked on integration, financing, and delisting, and we are satisfied with the progress made. At the end of the day, what matters in our business is the amount of carry (carried interest) dollars, rather than the number of deals done.
How was the experience of investing in Apollo Hospitals? We had made both a PIPE (private investment in public equity) transaction and an open-market investment with Apollo. When we invested about five years ago, Apollo was a strong, but not the largest, player in the hospitals space. (At that time) you had Manipal Hospitals, Wockhardt, Max and Fortis Hospitals. Today, Apollo is head-and-shoulders above anyone else in the hospital space in India, and is clearly regarded as the leader and the most respected company in the space, growing more than 20 per cent yearly. We have a very good partnership with Apollo and it has been a great journey. We had invested over $100 million and the deal has gone well.
Do you have any immediate plans to exit from Apollo? We invested from a large global fund of $15 billion and there is no pressure to exit. We would rather play for a multiple and hold for a longer term. Apollo is growing fantastically and has capex plans to add another 3,000 beds on top of the 5,000 beds it currently has. We are not in a hurry to exit from Apollo Hospitals. However, it is unlikely that we will make further investment in Apollo, given the age and original cost of the investment. By virtue of a holding, we love it.
What is Apax’s investment strategy in India? We have a focus on three emerging markets globally — India, China and Brazil — and the same strategy is followed for all emerging markets. Deal size is in the $200 million-500 million range. As mentioned earlier, we tend to go for either buyouts or significant minority investments, and the percentage of stakes we acquire is dependent on the nature of the relationship. In some situations, it may also go up 40 per cent in a minority situation. We have no country- or sector-wise allocation out of our fund, which gives us the flexibility to invest depending on the cycle. And, of course, we only invest in our five core sectors.
How is your deal pipeline? Currently, we have six deals in the pipeline, out of which two are in advanced stages. Because of our strategy, we don't have a strategy of pursuing only PIPEs.
We like to own either majority or significant minority stakes. The market seems to be moving towards our strategy. We may do one deal over the next 12 months, but it’s a hard call given (the nature of) our business.
But a lot of buyout funds are inactive due to lack of buyout deals or significant-minority deals...
We prefer buyouts for our pipeline, and there are quite a few opportunities. Contrary to the past, promoters today are open and willing to sell their businesses. For example, promoters sold in cases such as Ranbaxy, Piramal, Patni and Paras. Today, selling to private equity is a real exit option for promoter families. Public market is not an option for exit for promoters. Private equity funds have the ability to offer good valuations. Age is another factor. First generation entrepreneurs are going at 60-65 years in age and are seriously considering sell-off as an option. Often, their children want to go into other areas, much like the next generation in the case of Patni. Sell-out is an option and we see a fair bit of interest from promoters to sell.
Promoters are looking to sell, but they never think of selling to PE or to a buyout fund... It depends on the sector. If someone sells, he wants the highest price — either from private equity or from a strategic buyer. In certain sectors such as pharma, strategic buyers are willing to pay big prices, which private equity firms will never match. But there are sectors where there is no interest from strategic investors — either the business is very local, or cross-border synergies are fewer, or the company is too small, or PE can partner with a strategic (company). In those cases, private equity can be competitive. Paras Pharma is a real example — Actis bought it and turned it around and made a great return. In the case of partnering with a strategic (firm), that’s what we did in the case of partnering with iGATE to acquire Patni.
If you narrow the focus, which are the significant sectors in India for Apax? We invest across five sectors — tech & telecom, healthcare, consumer & retail, financial & business services, and media. This also holds true for opportunities in India. We tend to stay away from sectors that are heavily influenced by regulatory changes. So, for example, we don't invest in real estate or infrastructure. And, we have avoided retail so far, because the regulations weren't supportive. But this might change.
Are corporate governance issues or regulatory hurdles a real concern in India? We like to partner with great management teams because we have seen the kind of positive impact that professional management can have on a company. Having a sharp focus on a few sectors allows us to know those sectors pretty well, including the companies and management teams in the sectors. Pretty much within a minute and a half of meeting a promoter or a banker, we know if it's an Apax deal and it's something we would be interested in. Due diligence is, of course, something that needs to be done thoroughly. But if you've studied your sectors as closely as we do and there is no pressure to deploy capital, one can pick winners and weed out the bad eggs. On regulation, as I mentioned, we have stayed away from sectors heavily influenced by regulatory changes.