It’s not easy to excite V.G. Siddhartha Hegde, a serial entrepreneur and owner of the popular Café Coffee Day chain. Late in 2009, however, he had a lot to look forward to. Hegde, trained under India’s best-known investment banker, Mahendra Kampani, was all set to meet the brass of the $61 billion (Rs 3.01 lakh crore) private equity firm, Kohlberg Kravis Roberts & Co. (KKR), Wall Street’s 800-pound gorilla.
Hegde first met George Roberts at the Belvedere Club at the Trident Hotel in Mumbai for an hour in November 2009. There they swapped stories of how they started their business with meagre capital—Hegde with Rs 10,000 in 1985 and Roberts with $10,000 in the 1970s. In December, Hegde met Roberts’ cousin Henry Kravis, who was on Christmas vacation, at the Taj West End Hotel in Bangalore for two hours. A month later, KKR invested $80 million for roughly 12% in Coffee Day Holdings.
Hegde recalls he had met other PE firms, but KKR had asked the most questions. He was well aware of its reputation for leveraged buyouts (LBOs) in the U.S., but still decided to go with it, along with two other PE firms, New Silk Route and Standard Chartered. “They had a more long-term view than the others and were still willing to let us have management control,” says Hegde. When he said he could take Café Coffee Day public in five and a half years, Kravis said he was fine even if it took seven.
Others react to KKR with awe. Sanjay Chamria, managing director of Magma Fincorp, a Kolkata-based finance outfit in which KKR invested in May, says people have taken notice of the transaction because it’s KKR. And no, he hasn’t met its founders yet, but is looking forward to it. “This could be a life-changing meeting,” says Chamria. “They are legendary people in the world of investment.”
No big-bang deal. No shaking up the market. The world’s biggest, meanest, and one of the most respected firms in PE made a quiet entry into India two years ago and has made a handful of under-the-radar transactions. So far, that’s six deals in PE and eight through the nonbanking finance company (NBFC) it has floated. Not one of these bears its fearsome trademark—a leveraged buyout firm gunning for control. Remember Barbarians at the Gate, the book on KKR’s $25 billion RJR Nabisco deal in 1989? It was even made into a TV movie in 1993, with Jonathan Pryce playing Kravis, and the buyout of the U.S. tobacco company remains one of the biggest LBOs ever.
In India, KKR (officially called KKR India Advisors) seems to have no fetish for control: It has stakes of around 20% or less in the firms it has invested in. (In contrast, rival Blackstone India’s deals have typically been accompanied by management control.) It doesn’t even have an India-dedicated fund. The deals dip into the Asia fund which raised $4.2 billion in 2006 and will perhaps be raising another billion later this year. There’s a possibility of another Asia fund being raised next year. Later, if the situation arises, KKR may think of an India fund.
KKR’s investments before it set up office here include $250 million in Bharti Infratel in 2008 and $900 million in Flextronics Software Systems (renamed Aricent) in 2006, when it acquired the firm. These were through its European fund.
Even three years ago, KKR, which started in 1976 and listed on the New York Stock Exchange last year, was focussed mostly on the U.S. In 2007, it completed the largest LBO in U.S. history, that of Energy Future Holdings (formerly TXU Corp.) for $48.4 billion. The same year, it bought out Alliance Boots, which owns Boots U.K., Britain’s leading pharmacy-led health and beauty retailer, for £12.4 billion, and First Data, a credit and debit card payment processor, for $29.5 billion (together with TPG Capital). A year earlier, KKR had raised a record $17.6 billion for its PE fund KKR Fund 2006.
Its push into India (and Asia), though recent, is gaining momentum. Kravis has been here three times in the past two years. Roberts has also been over. Though neither was available for comment, in interviews to local media on previous trips, Kravis has spoken about why India is important and the promise it holds.
KKR FIRST STARTED SCOUTING for someone to head its India operations in 2006. Sanjay Nayar, 50, was then CEO of Citibank in India, and tells how Joseph (Joe) Y. Bae, managing partner of KKR Asia and member of the firm’s management committee, courted him for a few years before he finally joined towards end 2008. He had also met Kravis a few times at Davos. Nayar wasn’t the only candidate, but ultimately the job was his. By then he was “bored” with banking and Citi, in part because as CEO, he had become an uber-administrator and wasn’t having fun anymore.
“As a bank CEO, over time you begin to bless this and bless that. PE brings you back to the rigour of thesis, of numbers,” says Nayar. But, even after he signed on the dotted line, it would be nine months before he would finally join. He left Citi on a Saturday and joined KKR the following Monday.
His hiring says a lot about how Kravis and Roberts are thinking about India. Though not classically an investor, Nayar’s been an inveterate banker, with years of global experience. He’s also formidably networked. Those who know him say his access to India Inc.’s A-Team—the likes of Ratan Tata, Kumar Mangalam Birla, and Sunil Bharti Mittal—is unparalleled. Some of them may even have endorsed his bona fides. In Nayar’s universe, a platinum Rolodex is a matchless collaborator. Café Coffee Day’s Hegde says though he never banked with Citi, he had known Nayar before they first met on the deal. But to see Nayar’s candidature only in terms of whom he knows doesn’t capture it all.
To hear Nayar describe it, there are strong parallels between the way he ran Citi and the way KKR is thinking. When Sandy Weill, Citi’s chairman and CEO, sold him the India position in 2001, he’d pushed Nayar to build a large, India-focussed operation. “Sandy asked me to localise Citi. You know, a bit like what (Hindustan) Lever had done here,” says Nayar. So, among other things, he went on to build “Indianised” capital markets, investment banking, and small and medium enterprises (SME) business.
He points to SME as an example of something that Citi used to traditionally avoid. But by the time he quit, he had built a $2 billion SME book. “I can’t think of too many foreign banks which have done that,” says Nayar. He adds that he feels his success at localising Citi was one attribute that weighed heavily in his favour, though Kravis never told him so.
The firm landed at a time when PE was at a low ebb. A recent Bain & Co. paper (India Private Equity Report 2011) says that 2003 to 2008 were rapid takeoff years for the industry in India. Investments then stagnated in 2008 and 2009, after the global meltdown, and picked up again in 2010. India saw the largest increase in deal activity among the big Asia-Pacific markets in 2010. But the consultancy goes on to state that the average size of deals (at less than $40 million each) is still very small by global standards. Promoters have also, on average, given away only a 25% stake to investors and treat PE funds as the last resort, as they would have to cede ownership and sometimes managerial independence.
Rahul Bhasin, managing partner, Barings Private Equity (India), captures the mood: “The music may stop anytime.” Clearly, with more than 400 funds competing, India is not an easy market, even for the iconic KKR.
But who said KKR would be just about PE? “Indian promoters want all kinds of solutions, such as flexible deals, growth capital, etc., and I want to be in a position to do that. Today, no one size fits all. We can be a pure PE firm later,” says Nayar. For him, KKR will actually be more like the erstwhile merchant banking firms, which gave promoters advice across multiple asset classes. Think Lazard or Bankers Trust.
This model also allows for a fair amount of flexibility when it comes to size. The $52 million Magma Fincorp deal is the smallest that KKR has done. But then, those who knew Nayar during his Citi days say he was a master at convincing his bosses why exceptions needed to be made for India. For example, they point out that he was often able to push through rates that were lower than Citi’s threshold rates.
For firms like KKR, a more compelling reason to take a different approach with companies in India and China has to do with the macroeconomic environment. Though the average deal size in China is much larger, the principle remains the same. If PE money in the developed markets is typically accompanied by cost cuts, asset sales, and efficiency drives, it’s all about underwriting growth here. Scott Bookmyer, Asia head of Capstone, KKR’s in-house consultancy, says: “Two-thirds of our pan-Asian work is focussed on growth. But in China and India, the focus on growth is 100%.”
B.V. KRISHNAN, ANOTHER EX-CITI MAN, is a key player in the multiasset class approach. He heads KKR’s NBFC business, an arm that was Nayar’s idea. What that essentially does is open up another source of financing: debt. “When we came in, it was pretty intuitive that what you need to be in India is a capital solutions provider and not necessarily an equity guy or a debt guy,” says Krishnan. This complements PE.
“We see it as an adjacency. Say an opportunity comes in, but it isn’t really suited to PE. Can we do something and be creative about it?” asks Krishnan. KKR has been known to do this around the world. Of the $60 billion that it invests, nearly $15 billion is a combination of fixed-income securities, mezzanine finance, and the like.
In this nontraditional, high-yield, debt financing market that KKR is trying to create, it is particularly bullish about mezzanine financing. Nayar believes that there are plenty of small companies in the growth phase that don’t need to raise expensive equity that could benefit them. There’s another advantage: the NBFC relationship can also be parlayed to the PE business.
The total amount of capital invested through the NBFC is Rs 4,500 crore across eight deals. KKR is particularly reticent about the deals it has done through the NBFC. (On the PE business, they’re more forthcoming: Café Coffee Day, Avantha Power & Infrastructure, Bharti Infratel, Dalmia Cement, Jindal Steel, and Magma Fincorp.)
The one that leaked to the press was when Analjit Singh of Max India needed money for investment. KKR invested around Rs 550 crore as debt with collateral of stock. It’s also possible that some of the deals may have both the PE business and the NBFC at work.
REGARDLESS OF HOW A DEAL IS ultimately funded, KKR sees itself as partner with skin in the game. Magma Fincorp’s Chamria recalls his first meeting with KKR last year. Magma Fincorp was a small leasing company, which lent to truck drivers and machine operators in East and North India. Chamria wanted Rs 500 crore to take his business national. One hot and humid May afternoon, Nayar walked into Magma Fincorp’s Park Street office in Kolkata, and Chamria’s expansion plans suddenly began looking more real. After weeks of meetings and presentations, KKR invested $52 million for a 14.9% stake in Magma Fincorp, prompting the World Bank’s International Finance Corporation to follow with another 12.8%. Magma Fincorp is now doing up a sprawling office in Vikhroli, a Mumbai suburb, to expand its business to western India.
Chamria says a few others were also interested in the company and the financial terms offered were similar, but ultimately he went with KKR because he “felt comfortable”. He adds: “As a promoter, we see a much longer horizon than a PE investor, whose horizon may be five to seven, or at the most, say about nine years. The alignment of vision is very important.”
This is a big idea for Nayar. Magma Fincorp, he says, had the standard questions and anxieties that most Indian firms have about stake, control, etc. So it was critical they understood each other. Humility isn’t a trait that is easily associated with suits from PE firms, but that’s exactly what Nayar wants his members to exhibit. As he puts it, nobody from KKR is “God’s gift to the promoter. They have to want us”.
Nayar believes such a mindset changes how KKR behaves compared to other PE firms whose young Turks strut around. “For example, we don’t beat down promoters, because everyone has pressure on margins in this economy,” he says. Patience is seen as a virtue and the message comes right from the top. “Unlike what you guys think, Kravis and Roberts aren’t pushy dealmakers,” says Nayar. KKR’s average term of investing: seven and a half years.
But there are more fundamental reasons why getting the dynamics right with Indian promoters is important. Funds that invested earlier rode the valuation game because of buoyant capital markets, but those days are now over. With multiples no longer growing rapidly, for decent returns, firms need to work hard with managements to improve the plumbing (cash profits and the like) of companies. “We have to think like a co-promoter,” says Nayar.
This helps. Towards end of 2010, KKR picked up 9% in the Gautam Thapar-owned Avantha Power & Infrastructure. It was supposed to list thereafter but that got postponed once the markets turned. That’s when KKR took on another 11% of the company. It was a classic case of PE filling in for the capital markets in bad times. But the larger point is that Avantha returned to KKR for its needs. Heramb R. Hajarnavis, who is heading KKR’s PE business after 14 years at Goldman Sachs, says it is important to engage in healthy debate and gain the promoter’s respect. “If I need money badly today, I just have to call Nayar and he will arrange the best rates in the quickest time,” says Café Coffee Day’s Hegde.
THERE’S A PATTERN TO KKR INDIA’S bets. The companies, all managed by relatively young CEOs, are in industries that are growing rapidly (power, retail, infrastructure, leasing, etc.) and cash hungry. Says a senior executive at Magma Fincorp’s rival, Shriram Transport Company: “Fast growing businesses offer a lot of opportunity for capital and maybe KKR feels the same will happen with Magma.” Shriram itself has benefited from PE, and insiders say this was one of the examples used by KKR to convince Magma Fincorp’s promoters.
In 2005, TPG, one of the world’s largest PE firms, invested around $120 million in Shriram. That has grown nearly eight times now as Shriram’s business of lending money to buy used trucks boomed. Subsequently, TPG has taken a stake in Shriram Ventures, a consumer and retail lending business. Indeed, there’s already speculation that Magma Fincorp is in talks with KKR for one more round of funding.
However, it isn’t easy doing deals here. First is the lack of a significant number of midsized companies. “India is unlike China. Here the big companies are small, and the midsized companies are really tiny,” says Nayar. Returns are also nowhere compared to global averages including China. As of now, KKR’s investments here are giving returns which, if they continue, will make about three to four times, compared to a global average of about nine times. Furthermore, Indian promoters on average give away only a 25% stake. (The average promoter holding in Indian companies is 43%.) “So in a minority situation, you are not really calling the shots, but what you can do is influence the outcome,” says Hajarnavis.
Sometimes that takes the form of using the KKR global network to help out the Indian company. When Café Coffee Day was looking for a company that makes beverage flavours, KKR nudged it towards Germany’s Rudolf Wild. It helped that KKR had bought Wild in 2010.
Often it takes other forms. Consider KKR’s Rs 750 crore investment in Dalmia Cement for a 21% stake in May 2010. Even though it doesn’t have a controlling stake, KKR first advised the company to separate its sugar and cement businesses (and took a stake in the latter). Then, even before the deal was closed, it brought in Capstone as consultants. Capstone’s engagement usually lasts for three years or half of KKR’s term. In Asia, it’s currently managing 23 projects, mainly in China and India.
As Bookmyer explains, the objective is to make the company ultimately independent of and not dependent on Capstone. “Because we are also owners, I can enter the office of Dalmia and say, ‘We are not exactly there yet. This is bad for you and me.’ A consultant would have just made a recommendation.”
For Dalmia Cement, Capstone is trying to augment the sales and marketing reach, beyond its core states of Tamil Nadu and Kerala. Capstone’s consultants have been talking to dealers, customers, managers, the works essentially, to figure out how the company’s sales process works. The new processes will be rolled out soon, which Bookmyer explains will be the backbone of Dalmia Cement.
Capstone’s consultants are also told to be as low key as the PE folks. “We always want to be inclusive but never intrusive,” says Nayar. This structure also potentially allows the companies in which KKR has invested to talk to each other. For example, Dalmia Cement and Café Coffee Day learned from each other’s distribution chain.
WHEN NAYAR joined KKR, the thing that struck him was how his span of control had shrunk. At Citi he was heading many different businesses with thousands of employees reporting in. Here, he was the head of a 14-member team. But he soon realised that his control also extended to the companies where KKR had invested, since he saw himself as partner. He’s betting that going forward there’ll be many more opportunities to expand his boundaries. Nayar says globalisation, efficiency drives, business exits, issues with succession, uncertainty of capital markets, etc., will all drive promoters to PE firms. And he will be waiting.
