Price determination is often driven by private equity: Robert Davis

Interview with Head of Europe, Avendus Capital

Avendus Capital, the Mumbai-based investment bank, had strengthened its operations in Europe by hiring Robert Davis, the merger & acquisitions head of Nomura, in 2011 as head of its Europe operations. Robert has played a key role in cross-border deals between India and Europe. He speaks to Reghu Balakrishnan on the Indian appetite for such deals, post-merger integration, etc. Edited excerpts:

How do you see the investment landscape in India?
From a European perspective, the growth in India of about eight per cent over six or seven years, was built on previous deregulation and structural reforms they'd put into place. But structural reform stalled somewhat and the growth fell as a result. Now, it looks like structural reforms are coming back. From the European perspective, that is being viewed positively. If you sit in Europe with almost no GDP growth in the foreseeable future, then a GDP growth of about five per cent is a problem we would like to have.

How does Europe see India as a private equity destination?

All the European funds that have a particular interest in India have already established local offices here. They understand the different investment models here. And, they're private equity, all acting in competition with local PE. I'm sure others will slowly set up offices in some time. But we see very little direct investment from European PE funds without a local presence in India. If they don't have that local presence, they're not competitive.

What reflections have you seen in cross-border M&As, following the downturn?
In terms of asset valuation, it first came down within Europe. That's primarily a function of availability of credit. Price determination is often driven by PE and strategic bidders have to compete with PE.

As there was no credit available, prices came down quite a lot. There's much more credit available now but it's still quite fragile; in the past, even for quite standard industrial companies, acquisition finance was available at eight times Ebitda (operating earnings). Now, it's much lower, at 2.5 to three times Ebitda. But it's the maximum available and that's impacting asset valuation significantly.

Today, how aggressive are Indian firms on foreign buyouts?
In term of large acquisitions, you can almost segment the Indian interest into two categories - one is IT (information technology) services and BPO (business process outsourcing) and the other is everything else. The UK market is not a homogeneous one, there are language barriers but, most important, culturally, the corporates weren't open to outsourcing, 10 years ago. The European corporates now realise it can work, and are working very successfully under the increasing pressure to reduce their cost. With some of the issues in Europe at the moment, there's a lot more openness to outsourcing from the European side. And, the Indian IT services and BPO companies are very underweight to continent Europe. In the past six months, Cognizant and Infosys have made acquisitions in Germany or, rather, German-speaking countries such as in Switzerland.

Have other markets become a threat to Europe over inbound deals in India?
The Japanese are definitely coming. And, I've seen that during my nine years at Nomura, the Japanese perception of India changed noticeably. I think the increasing concerns in Japan are that they are too dependent on China and there's also a lot of Japanese manufacturing happening in China at the moment. And, China's not necessarily their friend. There are political issues there.

A lot of large Japanese companies have adopted a manufacturing strategy for China plus one, creating their second manufacturing hubs outside of China. And, India is increasingly becoming somewhere they look out for that.