on Blackstone's India plans and his investment outlook. Excerpts. You have invested $275 million in Ushadoya Enterprises, the holding company of the Eenadu newspaper and ETV franchise. This is the largest investment in the domestic media sector. What attracted you to the media sector?
Yes, it is the largest P-E investment in the media sector. More importantly, it is the largest P-E investment in India outside the traditional telecom/IT/BPO sectors. The potential for growth in the media sector is immense. The opportunities in the media sector are related to the future growth of the advertisement industry which is, again, linked to the growth of economy.
Personal income on a per capita basis is growing at 6-7 per cent in the country, which means the ability of the consumer to spend more on non-food items is increasing. There is growth in each and every sector "" like FMCG, auto, retail "" to name a few, which will have a direct impact on the advertisement industry.
We expect a secular growth in consumption with GDP growing at about 8 per cent per annum. The headroom is huge. Just to drive the point home, you may consider these numbers: in India, advertisement as a percentage of personal consumption is only half a per cent, while it is more than 1 per cent in China and around 2 per cent in the US. I am sure that the sector will witness the same high level of interest that the BPO and telecom sectors experienced in the recent past. Looking ahead, one might also see a lot of private equity participation in pharmaceuticals, real estate, export and infrastructure.
How have you hedged against a possible downside?
Eenadu has a dominant position in the newspaper business that provides steady and growing cash flows. The TV business is growing faster, but also has greater risks. But they are in six different regional markets. That provides a great diversification. With the investment, we will have a representation on the board of the company so that we can also add value to the company's growth and monitor our investment closely.
What kind of value can a private equity investor bring to the table?
Both sides "" the entrepreneur and the private equity investor "" are responsible for creating an environment so that an investor may add value to a company. One of the guiding principles of our investment process is that we have to feel comfortable with the entrepreneur of the company. In fact, we look at the entrepreneur first "" his ability and keenness to work with us. Then we look at the competitive situation of the company in the business it is in and its capability to grow.
This rigorous process of choosing our investment partners has restricted us to pick up only two firms from the over 250 deals we considered in the last 16 months. We are sure to help the management of the company, where we are putting in money, run their business better. If we think we will not be able to gel well with the management, we simply don't invest.
Only two companies out of 250?
Our investment committee approved four deals. We selected these four out of the 250 we looked at. But we could invest in only two. Our inability to invest in at least one of the two was because of inexperience. We should have invested in that company. The other one was a public company and we did not have our framework ready in time for investing in public companies. By the time we finalised our guiding principle for investing in public companies, the stock of the company went up 30 per cent.
You may call such instances our initial inexperience. As an American company, we also need time to understand the structural differences in the Indian market as compared to our traditional European/North American markets.
Are you now ready to invest in public companies?
Yes, we are. Although we are very selective and we need to have a board seat.
Do you have any minimum ticket size of investment?
We normally look at investments only above $25 million. But this is also an arbitrary figure. If we find a compelling proposition where we can create value and get an over- 25 per cent return, we may think about diluting that threshold. There is no upper limit of investment. We prefer to do due diligence in a non-competitive situation where we are not competing with any other P-E player.
But you were also a party in the Hutchison-Essar deal with other P-E players including Carlyle...
Hutchison-Essar was a big deal where you could not have this kind of exclusivity.
For quite some time, valuations have gone through the roof. Does it worry you?
You need to look at valuations in relation to the expected growth. See, we are not a short-term player. And we are confident that the India growth story will continue. There may be a slowdown in growth due to internal and external policies. But overall we don't see any problem in the next five to seven years. Huge investments will be required to prepare for growth which is propelled by booming consumer demand. This, I believe, is irreversible.
P-E investments have trebled in 2006 compared to 2005. To what extent would these go up this year?
I don't want to predict any number. But our vision is clear: we want to grow in India. We plan to increase our size, in terms of professionals. We have seven people on our rolls and want to add another two this year. But finding people of high quality is the biggest challenge. We want to have the best team in the P-E industry in India.
How is Blackstone different from other private equity players?
A clear differentiator is that we believe we are value-added players. We want to help enhance the objectives of the entrepreneur subject to only one constraint "" we need to earn on-target returns on the capital invested. We also position ourselves as catalysts for cross-border activities and as partners for growth over a long term. We are in a unique position to bring in our global expertise to enhance performance. We will be performance-driven at any stage of our partnership. We want to have the highest standards of transparency and governance in our portfolio investments.
