Next deals will be largish, controlling and transformative: KKR India CEO

Sanjay Nayar shares KKR India's investment plans

Foreign Institutional Investors (FIIs) withdrew about $1.7 billion of funds from the Indian stock market last month amid talks of an interest rate cycle reversal in the US. However, US-based private equity (PE) funds continue to pump in money in private space. Sanjay Nayar, chief executive officer of KKR India, in an interview with Abhineet Kumar on why private equity (PE) firms continue to be bullish on privately-held Indian companies at a time when there are valuation concerns for publicly-listed companies. He also shares KKR India’s investment plans. Edited excerpts:

At a time when foreign portfolio flows are waning, private equity flows have remained strong. What does it explains?

PE capital flows have increased on a trend and structural basis for many reasons. The first reason being the growing confidence among PE funds, as they are starting to get money back. The sentiment within the LP community is hugely positive, which is visible in the funds raised by various PE funds, including us. The government has effectively worked towards sorting tax issues. The economy today is on a very good footing, driven by strong political stability and certainty. There has been a measured approach towards capping subsidy and spending has increased on infra, railways, highways, etc. Other impactful structural reforms such as the National Company Law Tribunal (NCLT) process and bankruptcy code have driven companies to settle dues. These initiatives have helped alleviate capital constraints of banks to some extent. Nevertheless, progress has been in the right direction. KKR and the industry overall have witnessed successful exits through the past three years, this has been a key driver of fund flows. As a result, PE is seeing continuous flow on the back of sustained economic growth of 6 to 7  per cent.

Does this really mean that we are on high growth path now? 

The government now needs to target a secular growth rate of 8-10 per cent. There needs to be a concerted focus on the structural changes in the economy, which will take India to a new phase of growth. While some positive steps to this effect have been in the form of GST and the Bankruptcy code, there now needs to be a focus on structural changes in the economy. It will be comparatively more difficult to drive structural changes in the banking, land and labour sectors but the process should be initiated.

In the meantime, the government should also focus on the sale of non-strategic assets such as some of the surplus land, and loss-making PSUs. However, in the long term, private sector investment will need to pitch in. Currently the private sector is still recovering from legacy debt and capacity underutilisation. This government is doing a good job by catalysing growth through public spending, however this must be ultimately replaced with more private sector investment. Given the saving investment gap, which exists and will continue to exist if India has to achieve these kind of growth rates, PE will play a very important role to bridge this gap. Further, PE represents strategic and patient capital which is far less susceptible to interest rate cycles and secondary markets.

In the US interest rate cycle reversal is expected soon. That will further affect FII flow in secondary markets. Is it concern for PE money too? 

No, this is not as big a concern for private equity capital as he said earler. Although, if the markets correct dramatically, then it is a symptom that they were rather overvalued and it does bring down the benchmarks of valuations.

What is your exit expectation from Gland Pharma following Shanghai Fosun’s proposal for buyout facing hurdle from the government?

We have not heard from the government as yet, positive or negative.

In June, KKR raised $9.3 billion Asia fund. What is the update for investments in India from this fund?

We recently invested $200 million in Radiant Hospital from this fund.  We are currently invested in pharma, financial services, telecom.  We are now focused on making significant new investments — coming out of continuous corporate dialogue and M&A activity. 

Given the backdrop of the Indian economy, our next deals will be largish, controlling and transformative.