It was a particularly trying moment in the negotiations. Blackstone, the US private equity giant, was in last-minute negotiations with the promoters of the Andhra Pradesh-based Ushodaya Enterprises, owners of Eenadu and ETV, to buy a stake in their media business. Broad details had been agreed upon and documents were being prepared when the deal makers realised that the structure can be tweaked slightly.
A plain vanilla equity structure (with cash being brought in lieu of equity shares) was fine, but a higher return can be squeezed out if preference shares could be added. The question then was about the fixed dividend on the preference shares. The Blackstone team debated the issue for a long time, but it was proving to be a knotty problem. The dividend should be high enough to cover Blacktone’s interest costs otherwise it wouldn’t make sense.
Akhil Gupta, the chairman and managing director of Blackstone Advisors India, didn’t bat an eyelid. “4.5%. It should be at least that much to cover the interest Blackstone is paying globally,” he told his team. In the end, they didn’t have to worry. Blackstone and Ushodaya opted for equity shares. But the incident highlighted Mr Gupta’s level of preparedness and attention to detail.
He not only knew how much he needed to earn but also his firm’s borrowing costs and rate at which he needed to earn to cover that. Before embarking upon the deal, Mr Gupta hired McKinsey & Co to study the media sector in India and Eenadu’s place in it thoroughly.
By the time the deal got done, he had digested every bit of information that was available. “He knew what he wanted and went for it. He didn’t waste time in preliminaries,” a person involved in the negotiations said. In the US, Blackstone is known for its flamboyance, aggression and arrogance. It is one of the biggest private equity funds, employing some of the savviest and smartest deal makers in the world.
Recent reports that its top executives are paying lower taxes on their huge earnings triggered Congressional outrage and prompted calls for a hike in tax rates. Stephen Schwarzman, Blackstone’s co-founder and private equity’s enfant terrible, is even more controversial. When he is not throwing lavish $3 million parties (where guests feast on $400 crabs while listening to Rod Stewart), he is bad-mouthing the industry, threatening to kill off competition.
Three years later, Mr Gupta and his firm are once again making news, this time for the right reasons. Blackstone has suddenly emerged as an aggressive private equity fund with a hunger for deal making. It has bagged deals worth $835 million in the past one-year alone.
The investments are small by global standards, where private equity (PE) firms raise funds of more than $10 billion and leverage them to bid for assets much bigger. Private equity in India is still at a nascent stage. The deal flow is thinner and the value of the deals also smaller. Big PE firms quickly realised that their India strategy will have to be different. The buy-and-flip approach will not work here. What will also not work is to be just providers of capital. In today’s world, money is easily available. A PE firm with only money at its disposal will be as useful as an actor with only brawn and no brain.
Indian companies have talent, understand the domestic market very well but lack the financial muscle to be big players on the global stage. This is where PE firms can play a role. They can use the expertise of hundreds of companies in their portfolio to provide expertise, support; they can apply the learnings in other global markets to India on a case-by-case basis.
Mr Gupta, whose India experience stretches back to his stint at RIL, is one of those who believes that PE firms will have to play the role of nurturing and helping local companies scale up. Mr Gupta, who started off his career at blue-chip firm Hindustan Unilever (then HLL), approaches deal making with a few simple rules. Don’t do secondary market deals where you have no say and no control. Wherever possible take control or have a sufficient say in the management. This will help the firm add value and show its expertise.
Its exposure covers a large number of sectors and the investment strategy it employs is different. Emcure Pharmaceuticals is a minority investment, so is Ushodaya (government rules prevent foreign investors from buying more than 26% in a media firm). Intelenet and Gokaldas Exports are both buyouts in BPO and textiles, respectively.
Blackstone plans to make Intelenet its vehicle for global and local acquisitions. It will pump in cash whenever needed to acquire companies and expand its network. Intelenet will also benefit by being a part of Blackstone’s network. Similar is the case with Gokaldas Exports. Blackstone plans to use its influence with its portfolio companies or its contacts in the US retailing world to help secure orders for Gokaldas Exports.
Such an approach is also fraught with risks. In the back of an appreciating rupee, fresh orders can do very little to stem the slide in margins. But the approach highlights Mr Gupta’s philosophy of the PE firm playing the role of an enabler and guide.
Ranga Raju, managing director of NCC, had three leading PE firms queuing up at his door. But Mr Raju opted for Blackstone. Blackstone used an extensive due diligence exercise using four independent agencies. Akhil Gupta personally visited NCC’s construction sites and attended several rounds of meetings with the management, incessantly probing them on various issues of strategy, before buying into NCC.
“We were impressed by Mr Gupta’s knowledge base and understanding of the industry. It was easy for us to communicate with him on the risks and fortunes of the industry,” said a senior NCC official. Blackstone had appointed KPMG, Amarchand Mangaldas, SSKI and McKinsey to conduct due diligence on various factors like NCC’s financial and growth prospects, legal issues, management structure and industry prospects. “This may be the crucial factor that differentiated Blackstone from other PE players,” said an investment banker.
“With its global reach, Blackstone brings immense value to us. Blackstone’s association will not only allow us to make additional investments in public-private infrastructure projects, but will also expand our capital base, which will enable us to bid for larger projects in the domestic as well as in the international markets. It also will strengthen our strategic positioning in the market,” said Y B Murthy, vice-president-finance NCC.
Blackstone took more than two years to get going in India. Said Balaji Rao, India head, Starwood Capital, the other US fund and a direct competitor to Blackstone in the real estate and hospitality space, “Blackstone took enough time study the dynamics Indian industry and to spot right investment targets.” However, he said that being a large-sized fund, it is more hierarchical and more layered which is affecting its market responsiveness. “A delayed decision means you are losing the chances,’ he said.
Others said Blackstone has deliberately taken the slow approach in building its Indian presence. They have taken time to study the situation, have brought in their own talent. Unlike Blackstone, 3i has relied on India experts. It picked up Mahesh Chhabria from Enam and Anil Ahuja from JP Morgan Partners before it started work. Also, Blackstone is very careful in investing their fund’s corpus in different sectors. As a fund manager puts it, it takes time to study each industry and take a call.
But now, there is a good reason why Blackstone is suddenly able to play catch up in the past few months. Initially, every investment decision had to be referred to an investment committee back home at its global headquarters. Inside 345 Park Avenue, Blackstone’s headquarters in Manhattan, New York, the investment committee would spend hours poring through the merits and demerits of the proposal. But now, it seems a lot of unshackling is beginning to happen.
There could be other reasons for the pace to quicken. Times are changing for PE players. Blackstone and other global players are realising that valuations and PE multiples in India are much more than that in the West as they also include a “growth” premium. In the past, they wanted to benchmark Indian valuations with foreign valuations but have now changed their tack. Besides, with PE funds finding it difficult to do leveraged buyouts in the West, the action could well shift to India.
Consider another fact: earlier PE firms used to be in the realm of mezzanine investments — companies who have been doing well and wanting to go to the next level, approached PEs to fund them. Now it is not so. PE firms are increasingly getting into large, established companies. The move for large-cap companies seems to have been backed by a need to increase returns. Hedge funds have already started losing with the average fund declining by about 1.3% in August.
Very little is still known about Blackstone’s operating team and investment philosophy. Despite repeated attempts, Mr Gupta refused to comment. Operating from a suite at Taj Mahal hotel, Mr Gupta is said to put in long hours at work. His biggest strength is his ability to forge relationships with companies and promoter-groups.
His advantage, bankers say, is because of the strong team which it has. Even as he is focused on the big picture, his team takes care of the details. The investment team in the country is said to be at around 8 to 10% of the total global investment workforce. There are two principals — Mathew Cyriac and Amit Dikshit. Both of them are said to be seasoned bankers.
Dikshit was with Warburg Pincus, Blackstone’s arch rival. He is said to be one of the co-founders of Auto Mart — he apparently sold the stake before going to the US and joined Warburg. His strength lies in the technology and services sector, a reason why he was closely involved in the Intelenet deal.
In the next few months, experts say Blackstone’s buyout operating style will be put to the test. Blackstone’s defining deal in the near future could well be linked to the textile industry. Many of the textile companies are today willing to give up control to financial investors. But much of the deal flow in that sector could depend on a few stellar deals.
“The smaller firms will look to the industry leaders to decide whether they can last out. If the top guys cave in, the smaller firms will be willing to be bought out,” said a Citigroup banker. That’s when Akhil Gupta’s patience will once again pay off.