Half the dollars deployed last year were in secondary deals: Pavninder Singh

Interview with Managing director, Bain Capital

Three months ago, Boston-headquartered Bain Capital acquired a 13.09 per cent stake in Pune's Emcure Pharmaceuticals for about Rs 700 crore from its rival, Blackstone, in a transaction called a secondary sale. This followed a 30 per cent stake buyout in outsourcing firm Genpact for $1 billion (Rs 5,583 crore) from General Atlantic and Oak Hill Capital in August 2012. This is half of the PE firm's India portfolio that also includes its maiden investment of a 25 per cent stake in Kolkata-based Himadri Chemicals in 2010, followed with a 8.5 per cent stake buy in Hero MotoCorp in 2011. Pavninder Singh, managing director at Bain Capital, who has been instrumental in building this portfolio, talks to Abhineet Kumar about his strategy to grow at a time when PE investments are declining. Edited excerpts:

Limited Partners (LPs) have been wary of secondary sales, as they see limited opportunity for growth in an asset which has already been with a PE firm. How do you resolve these concerns as you continue to grow taking an advantage of this route?

It is certainly a concern that some LPs have. But it is important to go beyond the general concern and evaluate the specific situation around why a company is being sold and what room for growth or improvement is left. For example, some assets have been in a portfolio for six-to-seven years and need an exit. In other cases, fund life or fund-raising activities cause general partners to seek liquidity. In India, PE players have often sold some of their best assets first or early because that is where they can show liquidity.

We have done secondary transactions in the market and found these to be high-quality companies with significant growth and profit enhancement opportunities still left. In India, given where the public markets are today, secondary sales will be an important source of exit for the old investments. Last year, more than half the market in terms of dollars deployed was secondary transactions.

What kind of challenges has economic slowdown posed to PE fund-raising? Where are you spending your time right now?

Fund-raising for India has been quite challenging, but that is a function of a few things and slower economic growth is just one factor. The other big challenge is that the industry in India invested a lot of capital in 2006-08, which has seen lower than expected returns and liquidity. Also, these investments were made when the rupee was at 45 to the dollar, which has now come to the level of 60-plus. That is a pretty significant hair-cut to any rupee return that these deals might generate.

We successfully raised $2.3 billion as second Asia Fund in early 2012. Over the last year, we have been spending a lot of time on our portfolio. We spend more than half our time as a team working with our existing portfolio, helping them navigate the current environment and actually take advantage of it by investing for future growth.

How much of your second Asia Fund will be invested in India?

We do not have any explicit allocation for India. We look for the best investment opportunities across the region, both for our LPs and for our own capital, given Bain Capital employees are the largest investors in the fund. If that means for one or two years we don't do a deal in a particular geography, that is fine. It is one of the advantages of having a regional fund instead of a country-specific fund.

How do you see exits for your portfolio in India?

Our hold period is, on an average, four to six years. We have held certain investments even for up to 10 years. When we invest, we have a certain set of goals for the company to achieve. In certain cases where we reach those targets sooner, we look to exit sooner.

The average weighted life of our portfolio in India is between two and three years. So, we are still early in our investment cycle and currently focused on continuing to grow and build these businesses.

Amid economic slowdown, what kind of opportunities are you evaluating for investments?

We tend to be a little more micro-driven than saying here are one or two sectors or themes where we are going to focus all our efforts. At the end of the day, we are looking for companies that have very strong market positions in attractive industries and with strong management teams. If you look at any of our investments, you will find these characteristics in common even though they are from very different industries.

Having said that, there are some themes today that investors are spending more time on. These are companies that are more into export-oriented sectors or consumer nondiscretionary spends such as health care, IT and BPO.

Another theme which you should start to see in the future is asset sales from distressed groups. You have already seen some companies selling non-core assets. While most of these have gone to strategic players to date, you could see a bigger role for PE in the future. As banks become more aggressive with promoters in terms of de-leveraging their balance sheet through assets sales, you will see this become a more interesting opportunity.