Since 1998, Rahul Bhasin has seen private equity in India come full circle — from its heyday of the mid-1990s and early 2000s to the crisis it finds itself in today. In an interview with Ranju Sarkar, the managing partner of Baring Private Equity Partners India talks about consolidation and his bets on Muthoot and Manappuram. Edited excerpts:
You said at a seminar that, going forward, returns will be lower across asset classes. What does it mean for the PE industry?
When I started in 1998, there were 40 firms. Then, there were six, and the general view was that you cannot make money in India. Then came the dotcom boom and 74 new firms cropped up. Within two years, most of them shut down; two survived. From eight firms in 2005, we have 1,000 firms today.
The reality is that most people in private equity don’t know private equity. What they should be contributing to companies often doesn’t happen.
The maturity of dealings with corporates is often not there; their judgement is often poor. So, as a system, the returns will be poor. I would be surprised if more than 30 firms are left at the end of this downturn. It is a 10-year cycle (the beginning of this cycle was 2007).
Can you give us an update on your first fund?
Our first fund was set up in 1998 and was fully invested by 2001. Over 12 times the corpus of the fund has already been returned to investors and approximately $50 million of assets still needs to be divested. We also have a $600-million fund; we have invested roughly two-thirds of it; we have a third to invest.
When do you plan to launch your new fund?
We would look at raising another fund sometime in the beginning of 2014. It will be roughly the same size as our last fund, around $600 million, and like all our previous funds, will be raised from global institutional investors.
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You are stuck with your investment in Kochi-based broking firm JRG Securities. How do you plan to exit?
This is one of those cases where our own diligence process was not good. We goofed on it.
We are committed to making this work. There have been challenges and there have been attempts at every stage to disrupt what we are doing.
We are putting together a team and doing all the right things. The industry is also challenged. But we are committed to making this work. It is happening, but it is rather slow.
What were the mistakes?
Our own diligence process was inadequate at that point in time. Being a public company, we could not do proper diligence. If you look at our balance sheet for the past two-three years, you will see a lot of write-offs. We bought the assets in good faith, thinking ‘it’s a public-listed company, so I should be able to believe what I see’. The lesson: even if it is a public company, you got to do your home work.
Are people willing to exit with whatever they can make?
Ultimately, that’s what will happen. Right now, there’s no panic anywhere. You have to understand one thing, in many parts of the world, returns are driven by leverage. In India, private equity uses no leverage. So, your ability to ride through a downturn is that much higher. Returns are lower but your ability to take shocks is that much higher.
You have invested in Manappuram and Muthoot. What was the thinking?
Short-term retail loans, especially at the low end of the society, are not available. Two-thirds of Indians still don’t have bank accounts. Where do they get short-term money? From the neighbourhood money lender, who charges exorbitant rates.
In lending against gold, these companies are catering to a different segment. Though they are charging higher than banks, for the customer it is significantly less than what they are used to paying. The vegetable vendor borrows money at one per cent interest a day.
Unlike banks, which are open from 10 am to 2 pm, these companies are open from 9 am to 9 pm; they are open even on Saturdays and Sundays. There is work ethics, there is customer service. My own belief is that the Reserve Bank of India’s (RBI’s) rules and regulations on them is completely misplaced, and stems from the fact that RBI has not done its homework. If their average loan duration is 100 days, what is the systemic risk?
Then, RBI has a different set of rules for gold loan companies, and banks doing the same activity. Basel-III has said lending against gold is a zero risk-weighted activity. RBI says if you lend against gold, you keep 12.5 per cent capital adequacy — this applies only for these private companies and not for the banks. In a sense, what RBI has done is ruin these folks, but they are still surviving.
Will the outlook change for PE with the Shome panel’s views on GAAR, retro tax?
Of course. The sentiment has improved dramatically. But to address the fundamental issues (of low returns in PE), you need to enforce contracts. Retro taxes are an issue of good faith. A government has got to behave like one; it can’t behave like an extortion agent. As an Indian, I was very embarrassed about the Vodafone incident; what I was more embarrassed about was that no one in Parliament spoke about it.