Thursday 19 June 2014

Interview with a Private Equity MD

Every now and then Bateman Begins conducts interviews with professionals working in finance in India, but for this interview, we are going to switch things around a little. Today’s interviewee is a Managing Director at a major private equity fund in the US, and has worked on investments in India in the past. He was kind enough to have a wide-ranging conversation with me and some of his insights are absolutely fascinating.

Read on to find out what an MD has to say investing and business in India in the most detailed interview ever conducted by Bateman Begins. He’s an American, so you get the added bonus of getting to know an outsider’s perspective of doing business in India.
Bateman Begins: Thank you for taking the time to do this. Let’s start with the kind of transactions that you have done in India. How was the experience?

Interviewee: I've done a few things over there – we outsourced a portfolio company's operations there and for another portfolio company we brought them there. They were an infrastructure service provider where we did an off balance sheet financing, basically a project finance deal so the portfolio company could provide services there.

When we did the outsourcing project there it was easy. We were basically just paying a third party who had everything lined up for us because the Indian company had done it multiple times and it wasn't controversial on the Indian side.

The other infrastructure deal we did was much more difficult because we were dealing with FDI, political and legislative issues, different states and municipalities and it had far more moving parts with more people involved. For this deal, we hired an investment banker who had a boutique firm in India who was from India but had spent 20+ years in the US as an MD at one of the leading BB's here and opened that firm's Indian operations so he knew where we were coming from as Americans but knew well how the system worked there so that helped us a lot in navigating the environment.

On a personal note, I'm American but have lived abroad in London and I've traveled extensively all over the world so I'm not a sheltered American but India's a tough place to go. I don't mean this is a nasty way but the poverty is pretty overwhelming to someone who's from a developed country.

Bateman Begins: Yes, even though poverty eradication is at the top of every politician’s agenda since forever, there’s still a long way to go.
What do you think of the business and investment landscape in India?

Interviewee: There's a lot of corruption and bribery here – I was going there often when that telecoms ministry scandal broke and it was something like $4b of bribery. The different FDI and other capital restrictions of bringing in debt from abroad really restrict the ability to invest from abroad. When we were doing the off balance sheet infrastructure deal we wanted to bring in large amounts of debt, a very common thing in project finance but we had to figure out some messed up way of turning 5% offshore debt into equity because if we borrowed in India prime was at something like 14%+ and made the project unviable. And we were building infrastructure, something at I think anyone in India would agree is needed.

The government is also highly fractured between the national, state and local municipality levels, making it difficult to get things done. I like India in a fundamental way but it's a tough environment all around.

Bateman Begins: I have to say, I especially agree with your point about FDI restrictions – creating investment structures that would comply with all the rules could be an entire profession in itself. But, here’s to hoping that things in India improve with the new government!

Interviewee: Absolutely, I would never put India out of the picture. I like the demographics (large, democracy and a much younger population than China) and I hope Modi can make it more friendly to international investments. I like India a lot more than China, having done business in both places. In India, for one because it's a democracy with roots in British law, you can own property, be that real estate, IP (intellectual property), a business, etc. and not worry that the government is going to simply take it from you because there's recourse in the courts, even if that takes a long time. In China you could build the next great whatever and the government can just take it from you and say thank you. Also in India if someone's trying to screw you, they're doing it right to your face. In China, they'll blow smoke up your bum for years and then backhandedly take it from you and try to put you in prison.

Bateman Begins: How was your experience in dealing with IB/PE professionals and businessmen in India?

Interviewee: Intellectually there are a lot of very well educated Indian businessmen. It skews heavily towards an engineering education which is good and bad: it means people are generally quantitatively excellent and numbers come easy for them and it can be bad in that engineers tend to be much more cut and dry and less creative when it comes to putting a deal together. This is a stereotype and obviously not true all the time, but I found that to largely be the case. Indians tend to be outrageously hard workers. It’s just the American investment banker who's used to working 100 hours per week, but in India, that's just about everyone.

Bateman Begins: If you think all Indians work hard, you obviously haven’t met many Indian government employees!
What are the most striking differences between business practices in the west and in India?

Interviewee: Culturally from a business point of view, there's much more in the way of soft meetingsand social events that you need to attend and often with your wife to get business done. It's also very largely an issue of who you know and who can help you out and that can easily be people outside of the business world. In the US or Europe, you need to know people who can get you money and how to get a deal done but you rarely need to know politicians, and that's largely how business gets done there, from my experience. Things also take a lot longer there than in the west and a lot of westerners have gotten burned because they go in thinking that things are going to work like they do here in the same time frame. It's just not true there. You basically need very good and trusted people on your team who are Indian, and I don't mean the Indian guy who grew up in the US or UK and thinks just because they're Indian by ethnicity, they'll be ok – you need people on the ground who live there and can navigate things there and that you can trust so that you don't get screwed or stolen from.

Negotiating is also different there, and I learned this very early on in my business career without ever going to India. I started out in real estate PE out of university in the mid-late 90's. I was an acquisition guy but we were relatively integrated on the acquisition and asset management side and owned buildings in the SF Bay Area and Boston, basically high tech hubs. A larger India tech company was opening their first US office and was looking at one of our buildings for space. I wasn't directly involved in the lease negotiation but we put out a proposal (and I'm using made up numbers because I don't remember what they were) and let's say that the market rate was $95/square foot so our initial proposal was for $100/SF. In the west, you'd probably come back as the tenant at $90/SF. They came back at $10. It just threw us for a loop and learned that if you want $95, you don't go with $100, you go with $200 and end up at $92.

Bateman Begins: Haha, that definitely sounds like an Indian – we always like a good bargain.
Coming to a point that many of the readers will be interested in, how often people from India break into PE at established funds abroad, without feeders like b-school? Have you come across any such cases?

Interviewee: I don't know anyone personally who's done it without one going to undergrad or b-school here. I can't really speak for the UK but I never thought about it when I lived there. That doesn't mean it can't happen but PE is pretty competitive and it's easier for a fund to hire from the more traditional route, that is to say, top undergrad->IB->PE->top MBA and back to PE, than it is to take a risk on someone outside of the traditional route, and I don't simply mean someone from another country specifically, that even includes someone from the US who doesn't fit the mould.

In addition, a lot of it is knowing how business operates in the country you're doing deals and your network there so I would think it would be tough, just the same as it would be difficult for a US PE guy without a ton of India experience to break into it there. Ten or twenty years ago it was popular for a westerner to get into the IB or PE business in emerging markets such as India, China, and the Middle East because there was a lack of knowledge and/or education in country but that's largely disappeared.

For example, when I was in university you could, without experience or only a couple of years of work, take a job in the middle east (Dubai, Qatar, Saudi, etc.) and double or triple your income from what you'd get in the US/UK and greatly advance your career by doing so. They had on campus recruiters from countries, not just companies, trying to get people to go because they wanted the US education and knowledge. Now that simply does not occur because there's native talent.

Bateman Begins: Guess Indian finance industry will have to do for now, then.
Thank you for your time and the detailed insights!

Interviewee: My pleasure. Good luck!


  1. Wow.. really insightful.. over that very well written..

  2. Hey BB, I realise its been long since you've discontinued the page but is there any way to access your email as the one you've linked says its not monitored anymore :(