AVCJ – Firm of the Year Baring Private Equity Asia

Baring Private Equity Asia’s efforts in India paid off last year with $650 million invested in Lafarge India and Hexaware Technologies. Jimmy Mahtani, the firm’s country head, tells AVCJ how it was done

Q: In the space of 12 months, Baring Asia has deployed more capital in India than for all the previous years combined. Why the jump in activity?

A: We have been trying for the last 2-3 years and it just so happened that a bunch of deals lumped up in the last six months. We have been working diligently over the last 24-30 months and deals didn’t close for different reasons – partly valuations, partly a change of mind from the seller, partly due diligence issues.

Q: To what extent have falling valuations been a factor?

A: If you look at valuations for good companies, I wouldn’t say they have come down dramatically, and certainly not as much as public markets. There has maybe been a 10-20% drop in the last two years. However, sellers are more willing to sell than before.

Q: And as a result we are seeing more secondary deals?

A: It’s been a very tough exit environment for everyone and as people start raising their next funds there are a lot more secondaries in the market. There are also cases in which investors have put and call options and these are being honored by promoters. It’s really a combination of how the funds work with the promoters and getting an alignment of interest. People don’t want to sell lock, stock and barrel. They are willing to sell a controlling stake to sponsors to help them grow to the next level but the mindset is: “Let them have control and in the next 3-4 years we will sell to a strategic.” To get these deals we have to be able to demonstrate some experience and operational capability in assisting them.

Q: How are you developing these operational capabilities?

A: The operations team is regional. The team head sits in Hong Kong and then we have colleagues in different offices. We had someone in India but it didn’t work out so we are in the process of hiring someone new. This person will do regional work based out of India because whenever we need assistance we leverage resources across the region. For example, two guys out of Singapore are working with me on Hexaware. We have seen very little churn in the India investment team and are now 10 investment professionals.

Q: Divestments from conglomerates are another growing source of deal flow. What challenges are involved in these deals?

A: The large Indian houses are selling what they perceive to be non-core assets and coming closer to the core, but in some cases they keep changing their minds – they are selling one day and not selling the next day. There is also a lot of competition for these deals and price expectations are usually very high. The large infrastructure conglomerates are in a lot of distress and it can be easier in these situations but we would only do them if they make sense.

Q: In the case of Lafarge, Baring Asia is a minority investor alongside a multinational. How do you ensure alignment of interest?

A: A lot of those issues are discussed up front and so far they have done everything they said they would do. With a lot of other companies, monthly board meetings last two hours and a lot of decisions are made outside of these meetings. At Lafarge it’s very structured and we have monthly calls and quarterly day-long board meetings and all decisions are taken there.

Q: Is a buyback the logical exit is this kind of situation?

A: It’s hard to comment but a buyback is definitely one of the options.

Q: To what extent can you obtain acquisition finance for larger India deals?

A: We got financing for both Lafarge and Hexaware, so it’s available but only for big transactions and large companies. If you are trying to get leverage for a $30-40 million EBITDA business it is going to very challenging. We obtained financing for our two deals on pretty competitive terms; the market is still relatively immature and there is a lot of leakage in the structures, but we were able to get a reasonable amount of leverage on both transactions. It’s all offshore financing and it works like any traditional buyout.

Q: What is your investment outlook for 2014?

A: We are spending a lot of time in financial services, consumer and healthcare, and then we continue to spend time on the portfolio to see if we can do a few acquisitions. It’s difficult to say whether more deals will happen in India this year because we are looking at opportunities across the region. The market is less competitive but for good assets the competition is still there. You don’t see too many $100-200 million deals of high quality and in those cases a lot of people are interested in the deals. All the global majors are around. On the domestic side there is much less competition however we are spending less time on $50 million deals and only selectively evaluate them. We do $100-300 million of our own equity and we are able to do substantially larger deals because we have a lot of active LPs.

Q: How important are macro conditions in India to your investment strategy?

A: Everyone is watching the elections so anything to do with government spending is being put on the back burner. But if you are looking at consumer or export-oriented deals, I don’t think the macro is going to play that much. The big thing is currency and if you have export-oriented businesses there is a natural hedge. While we follow the macro, it’s not going to drive our activity per se; we are not timing deals, just evaluating deals. If something makes sense at that point in time we do it.