Global private equity giant Carlyle has invested up to USD 3 billion in India so far and it is looking to invest further from its USD 1.04 billion global fund. Speaking to CNBC-TV18's Kritika Saxena, its India and Asia Managing Director Shankar Narayanan says that foreign investment is set to pick up in India like never before. He further adds that Carlyle will invest more in 2015 than it did in the last two years.
Below is the verbatim transcript of Shankar Narayanan's interview with Kritika Saxena on CNBC-TV18.
Q: In the last three years it's been a tepid growth story in terms of private equity investment, in terms of foreign investment but you've been fairly bullish on India. What really gives you this confidence on the country?
A: India entrepreneurs and the entrepreneurial spirit in India is world class and I've been doing private equity since 1993 and it has given me a lot of pleasure in meeting people who are self made, who come from middle class and lower middle class families. This is because when I was growing up, access to capital or control of capital was there only with a privileged few people who inherited well and that has changed for this whole venture capital private equity movement where if you had a good idea, if you were willing to work very hard, you got access to capital.
In cases like Carlyle, apart from capital you got access to a world class network of investor companies and relationships which could act as a catalyst in furthering your dreams and regardless of what has happened in the economy since 1991, I have always noticed people who have drive and hunger and a good idea and integrity, always succeed in the Indian context.
I have had the privilege of serving on the boards of all these people I have invested and I've seen how people with drive and hunger and integrity, if they partner someone like Carlyle are able to succeed beyond even their wildest dreams.
If you notice even some of the exits that we have made in what I thought was one of the most difficult markets, we were able to make very successful exits in companies like Thirumala, Repco because inherently these entrepreneurs had made great businesses that was very attractive for the various buyers to buy it and take it to the next level.
Trellis for example has brought a great business and it would help them really grow the business in India and the advantage in a company for example if I just continued on the example of Thirumala is because I gave capital, the company was able to take it to the next level. So, it created literally thousands of jobs because lot of farmer families, we were able to work with the company and banks, give them small loans with which they bought cows.
We were able to set up collection centres across the geographies they are covered in the southern states and because they had access to technology I had taken them to China and they saw some of the most advanced dairy companies there.
They were able to implement a lot of systems. They implemented SAP's ERP system so when a potential buyer like Trellis came they really saw a company that was quite profitable, that had built a network that is I won't even say not easy to make, almost impossible to replicate and they felt that with their knowledge of dairy etc they could use that as a base to grow the business further.
The net result is while we made a profit on investment, if you look at it from the country's perspective, we have generated a lot of jobs; you have increased disposable incomes for so many families across the spectrum.
You've got a world class dairy player come in so that the Indian consumer will have greater choice and it is these kind of investments that I feel over a period of time can transform the destiny of our country and make us go on the path where it will make us a much more developed country over the coming decade or so.
Q: Last three years have been slightly sluggish. There have been issues with respect to policy framework, regulatory hurdles. Going ahead, now with some amount of clarity when it comes to policy decision making and of course with the new government at the helm, do you feel that foreign investors like yourself for example, is Carlyle now looking at India differently with prospective of maybe a clearer policy frame work going ahead?
A: Carlyle is medium to long-term investor and we consistently invest because at the end of the day we are looking for good companies but I am very much enthused by what this new government has been doing because they have a sense of what make an economy tick, what makes a country tick and on a lot of things they have taken positive action.
The regulators in India are doing a great job and at the end of the day the regulators are the bedrock of a free market system because at the end of the day they are like referees or umpires in a game and it becomes very important they do it right.
The other thing is the government in their various pronouncements and I did see minister Jaitley also say that has understood that there is a cost for making frivolous tax demands etc because at the end of the day, the revenue after all the litigation is over, doesn't add to the kitty any revenue but it gives India a bit of a bad name and when foreign investors choose whether they want to come to India or not, they become hesitant.
The government is completely entitled to take what is rightfully due for it and it should and everyone will pay what is rightfully due but at the same time by making tenuous claims, it unfortunately creates a false image of the country that we are a country that it is difficult to do business and it is very refreshing to see a government which is obsessed in many ways in every decision it takes whether this is good for the country
From economic policy to foreign policy to domestic policy, the prism or the lens through which the new government has been looking at is if we took these actions whether it will benefit the country and for us if the country does well, our investments do well for sure and it's very encouraging and this seems to be one of the most promising governments that we have seen in a long time.
Q: Reforms have kick started or at least are in the initial stages. How long do you think it will take for the government to actually create a turnaround in India and how long would it take for foreign investors to actually look at India differently and say that okay this is a country where I can do business without issues like taxation or without worries of litigation or delays in clearances clouding my vision?
A: I personally think a lot of things are attitudinal. The government has the right attitude and its heart is in the right place and it is not a question of if these changes will happen, it's a question of when these changes will happen.
In an open society, in a democratic society, it is important that we give the government time so that at the end of the day they build a consensus, they have a situation in the Rajya Sabha as well so over a period of time it will change.
Private capital formation is very important for India in the next 20-30 years because at the end of the day it is this capital formation that will help people reinvest in India and get the multiplicative benefit that goes with it.
Increasingly, the one trend that I have also seen is we are becoming a society of laws. The judiciary is being exemplary in making sure that people have been held accountable for various acts.
As I mentioned, Sebi is being doing a remarkable job in ensuring that capital markets retail investor interest is protected. It is seen as fair and we have come a long way. We used to have a system which was paper based, settlements used to take forever and you used to have defaults in the exchange and none of that has happened.
Creating the NSE was a brilliant move by the government. So, a lot of government initiatives have worked out. The RBI has always been sensible in the way they've gone about.
In certain cases the government has augmented the capital of banks etc so India is a country where people still have a lot of faith in the banking system, a lot of faith in the regulators etc and by systematically making it easier to do business, not by diluting any of the safeguards that are there.
What I like about this government is they are not diluting in any way any of the environmental safe guards or safety safeguards but they are making the process much more logical, much more open and at the end of the day trying to make government as frictionless as possible so that business could do what business is supposed to do.
Q: You have been with Carlyle for around 11 years. As per industry watchers the kind of investment that has come in to the country has been over USD 3 billion. Going ahead would you say that the pace of investment for Carlyle in India will increase now?
A: We eventually invest based on how good or bad investment is.
Q: Individual companies?
A: Individual companies. Is the price right, is the sector interesting, will the company continue growing at a reasonable pace but what I can tell you is that we certainly see a lot more companies that we would like to invest. Eventually, whether they translate into deals or not depends on multiple factors. I sit on the board of directors of a company called Sian Infotech.
It's a extraordinarily run company, great leadership team where there has been a gradual translation into a new CEO and he's provided extraordinarily leadership and we've been able to put the company in front of lot of opportunities through the One Carlyle network.
They've been extremely successful in translating that into business and that means the company and investment does well but more importantly it means more jobs in India, greater revenues in India, greater taxation for the government of India and that is where a firm like Carlyle adds immense value.
Q: You are working out of a USD 1.1 billion fund currently, how much of an exposure do you see India having out of that fund?
A: We don't have fixed quotas, so the primary markets for this fund is - China and India are the dominant ones with a little investment going into Korea. So, South Korea, China and India are the key markets.
Q: Also where does India stack up in Carlyle's global plans even if you look at the developed economies or the emerging economies, where does India stack up in the hierarchy?
A: I personally think India and China are very important markets for Carlyle. Carlyle is committed to these markets for the long-term and I think in my whole lifetime Carlyle would be committed to these markets because these markets are markets with the future.
India has a demographic advantage, we have a young populous and you will see this young populous entering this workforce. About 65 percent of the people are under the age of 25 or 30. So, you will see rising disposable incomes, you will see greater savings rate, you will see increasing propensity to spend and this would result in a domestic GDP.
Exports constitute only 17-18 percent of the GDP but that 17-18 percent is important because what I call the India outsource is doing and I don't restrict it to IT or BPO but it could mean auto ancillaries, it could mean engineering design like we do. It could mean generic pharma, it could mean textiles. That acts as a big catalyst for the domestic economy because that in flow helps the country in many ways.
And domestically, you will see health care, you will see pharmaceuticals, you will see media and entertainment, you will see various consumer companies, all of them do very well and this is how some of these companies could eventually become world leaders and there are great companies.
We looked at investing in a company called FabIndia which unfortunately we didn't. It's run by a great leader William Bissel. I was pleasantly surprised when I was in the United States, a lot of their organic products you find in the shelves of places like Whole Foods etc so you will see companies like these becoming world leaders and that is very encouraging.
Q: Carlyle has been sector-agnostic in India but what are your preferred sectors?
A: We are not dogmatic, we are not ideological investors. We are investors who are looking to make a return for our limited partners because our fundamental commitment is to our limited partners because they trust money to us to make a return, so that is most important and as a firm, we operate within the confines of the law of all the lands that we operate.
So what we look for is to back entrepreneurs who have drive and hunger, who have a track record of performing and who have integrity and what I mean by integrity is the way they treat us, the way they treat their workers, the way they conform to laws of all the land because it is good business practice to conform with laws.
We like to back on entrepreneurs who have an attitude that says, look I am going to work very hard, I am going to make this company great and I am going to conform to all the laws and treat everyone with fairness and integrity.
Q: On the conversations you had with entrepreneurs, with perspective portfolio companies will 2015 be a better year than 2014 in terms of investments and can you put a number to how many deals you are likely to close in the next couple of months?
A: I have no doubt in my mind that 2015 would be better than 2014 or 2013. I have absolutely no doubt in my mind; as sure as the sun rises. I think it will be better.
On a day-to-day basis, month-to-month basis or even across a year there are multiple factors that could take things off.
The government is fortunate that oil prices are low because a country like India that is so dependent on imported energy, it is one of the greatest things that could happen. I think it gives time for India in many ways. I think we would be able to exorcise the ghost of inflation with oil prices low.
Q: How long do you think it will take to kind of curb inflation down?
A: There are supply side constraints but at the end of the day one of the most unfair things in a country that is poor in some ways, there are so many poor people in India, is inflation, I think inflation is a unfair tax on especially the poorer people because their basket of consumption which is primarily food and clothing, if you have inflation it is a hidden tax and you don't want that to happen. By taking steps to control inflation I would say hawkishly we are doing the right thing as a country and I think it will help.
Q: You are sure that India is at an inflection point and that we are gearing up for a turnaround?
A: I am very optimistic. We have a world class person as a Governor of the central bank, we have a world class regulator in Sebi under the leadership of UK Sinha and we have a government that is understood that they should create as little friction as possible in the investment climate in India.
Attracting capital, make it easier for people who have capital to setup companies and enterprises and industries and the pay off to the country will be huge.
Q: What are your preferred sectoral picks and sectors that you would stay away from?
A: We like export oriented businesses, we like domestic consumption themes. So, healthcare, pharmaceuticals, media and entertainment, consumer, technology, IT services, IT enabled services, high-end engineering design all of this.
Q: E-commerce too would figure in the list?
A: We have been looking at it; we have to get our arms around it. We like business where companies increase their profitability; that is important for us. It should converge to profitability, etc. So, we are studying the sector very actively.
Q: Would you stay away from telecom and infrastructure?
A: I won't generalise because in each of these sectors you find businesses that are interesting.
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