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Deal activity has spiked in India despite global issues: Goldman Sachs MDs

In a Q&A, Rajat Sood and Som Krishna say their company isn't absolutely return-focused, but is a relative value investor that is looking out for bogh buyouts and minority stakes

Som Krishna & Rajat Sood, managing directors, Goldman Sachs Asset Management

Som Krishna & Rajat Sood, managing directors, Goldman Sachs Asset Management

Raghavendra Kamath Mumbai
Goldman Sachs closed its $9.7 billion global investment fund, West Street Capital Partners VIII, this September. The US-based investor has parked $2 billion in India since 2021 and is looking to invest more through private equity, private credit and others, say Rajat Sood and Som Krishna, managing directors at Goldman Sachs Asset Management, in an interview with Raghavendra Kamath. Edited excerpts:

Which sectors are you pursuing more actively? Are there any new ones that interest you in the current situation?

Sood: We have been active in healthcare and pharma. Technology services and technology software have attracted investments from us too. Also, we are actively looking at sustainability driven themes where we have been prominent in the past, especially in renewables, long before they became a big thing the past few years. Additionally, financial services and consumer businesses are areas of interest. Another way to think of this is that fundamentally, we are looking at domestic consumption-driven businesses. Rising income, favourable demographics and positive government policies help us have conviction in backing businesses where essentially the consumer is the centre of the business model. That is a macro theme which gets us excited about India. The second is exporting India’s competitive services to the world, which we call the ‘India to the world’ thesis, such as technology-enabled services or pharma outsourcing.

The government is talking about local manufacturing in a big way. Are you planning to bring any global investee companies to India in terms of their technology or tech know-how?

Sood: The benefit of being a large global investor is the constant active discussions within our investee companies around the world as to how we can help them, including possibly building an India-based manufacturing or delivery centre when appropriate. Some companies are indeed considering India more aggressively as a base for manufacturing or services.

Is it possible to share the kind of money you put in over the next few years?

Krishna : India is an exciting investment opportunity and we expect to continue to grow our investments over time. On a conservative scale, we are looking to invest $4 billion over the next five years.

From an Indian perspective, what kind of changes have happened since you integrated these various businesses globally in 2019?  

Sood: In India we have built a dedicated team across all these asset classes.  We foresee a great deal of potential in the Indian market and have recruited accordingly. The team in India is part of a highly connected, broader global team, but a large on-ground presence allows us also to invest and operate in a more effective manner, while leveraging global resources, networks, insights and knowledge at the scale the entire Goldman Sachs platform has to offer to India. We are unique in that we are a globally scaled alternative investment platform in a large, global financial institution. I do not think anyone else can claim this scale within this kind of setup. The reorganisation was completed in 2020 and allowed us to leverage an enormous amount of resources towards India.  As a result, since the beginning of 2021, we have deployed nearly $2 billion locally.  

Krishna: The integration has made us much more resourceful for our clients and investee companies. In the local credit space there are proprietary flows we are involved in because the bankers in the United States are calling to say, “Hey, you recently did a deal for us here. We are now doing a buyout in India. Can you do the same financing for us there?” when those products do not exist locally.  As you know, with consolidation in the local banking sector and the NBFC (non-banking financial companies) crisis, flexible pools of capital have dwindled.  Also, the scale is different. This integration and focus on offering third-party pools of capital access to our investment opportunities means larger amounts for deployment. As India grows, that becomes ever more relevant.

The recession is looming large in the US. The United Kingdom is talking about the recession as well. In light of this, how do you look at India as an investment destination?

Sood: The global macro environment we are in currently is more difficult than what it was last year. That said, first: India's attractiveness remains high. India is continuing to position itself quite well, given the policies in place, the demographic fundamentals, income levels and the massive scale of technology adoption. Second, we are fundamental investors in India and globally, irrespective of the global macro environment. The focus is on quality companies with resilient business models and strong teams where we can provide capital and assistance steeped in global and local knowledge and networks. In India, we have seen acceleration in conversations and activity, despite what is happening on the global macro front.  There is no dearth of local quality companies.

Today we are in a different world with geopolitical red flags, interest rates going up, commodity inflation, a looming US recession. Have you been able to maintain your returns?

Sood: Despite the global macro environment, the operating performance of the companies we have invested in remains strong by and large. That is just a function of their resilient business models, management teams and the continuous help we have sought to provide to them as investors. The combination of all of that is helping tide over this difficult environment. If we look forward, for the time being, the public market environment is more difficult, such as the ability to do an IPO, but that could change with sentiment. In the meantime, as private market investors, if you take a view over a longer period of time, liquidity avenues in India have actually increased on a secular basis as the economy has developed and matured.

Krishna: If you see where our substantive sector investments are, our invested businesses based on thematic approaches are much more resilient in tougher times. While liquidity in terms of IPOs may be impacted in this environment, never has India seen the amount of private equity to private equity transactions happening. Such secondary buyouts are a clear symbol of the maturation of the Indian capital market, symbolising it has grown bigger and deeper. Overall, the number of buyouts in India has increased dramatically in the past 2-3 years.

Two more questions on the same trend. One, are exits becoming difficult in the Indian market? Second, are you increasingly looking for more buyout opportunities or do you want to have minority stakes in companies?

Sood: Goldman Sachs is across the spectrum.  We want to do both buyouts and minority stakes. What we are really looking for is a seat on the table and an active governance role whenever we are investing. As for smaller investment amounts, they are usually deployed in fast growth companies. These are typically tech firms in which we take smaller minority positions and have a board seat. We are not passive investors in any given situation, but always an active investor. This means being involved with the founders and constant conversations about value creation activity, such as strategic organic growth, M&A and talent acquisition. Hence, as a growth investor the substantial difference between us and venture capital is that we do not take business model risk, we are looking to invest in companies with a proven business model and unit economics. We enter firms that are already backed more often than not by venture capital companies, and which are looking for capital for the next phase of their growth to scale up, either organically or via M&A. The range for these investments is anywhere from $20 million to $150 million.  

On the control or significant minority investment side, we want to deploy $150 million and above. Our focus areas are technology-enabled businesses, software or services, healthcare and pharma, as well as sustainability and inclusion driven themes in India. We have a flexible mandate but are focusing on these segments as we are finding many interesting opportunities. If you are an entrepreneur or a team or a company, we have the full spectrum of investment sizes, vast experience and a proven track record to draw on to construct a truly mutually beneficial relationship.

With the rates going up in India and elsewhere, how has the demand for private credit in India been from corporates and SMEs in other segments?

Krishna: When opportunities to grow exist, but access to capital markets recedes, companies look towards those offering hybrid capital--debt plus equity. It is a preferred equity in the form of structured debt plus equity or anything that reduces the dilution for the client. Our scale uniquely allows us to address all the requirements of a client. Yes, rates have gone up, but companies still need to consummate their M&As. There are very few who can do a single window underwriting of a large transaction.  Closing such deals is possibly the biggest challenge facing companies and private credit can provide funding certainty.  

What kind of loan book do you have right now?

Krishna: A good portion of our Indian portfolio is a credit book, as you would expect.  As the economy grows, credit can become more attractive. We have multiple ways to provide value, including acquisition financing, direct investing, and a hybrid. It provides us products for different life cycles and different economic cycles.

How do you compete with government banks, which have an incredibly low cost of borrowing?

Krishna: We do not compete. We are in a different space. Banks invest and lend to a certain sector and a certain type of company. Outside of that sandbox exists a huge market that needs capital. The private credit market which we address has grown to $1 trillion globally. Today, we see greater interest in Asia and India as traditional banks are not flexible enough to complete certain transactions. That is where we come in.

What kind of returns do you look at when you do this?

Krishna: We are not an absolute return-focused investor, but a relative value investor. We aren't fixated by a certain base return. Having said that, we do not compete with banks and local NBFCs, and operate in a different spectrum.  

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First Published: Nov 13 2022 | 3:42 PM IST

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