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In India, Apollo Is A Contrarian Investor: Mintoo Bhandari

26 September, 2011

Apollo Global Management LLC, the $70 billion alternative asset management giant, started its private equity operations in India, just around the time of the global financial meltdown during September 2008. But that goes with Apollo’s DNA, which is a value investor, making contrarian investments in high-grown markets like India, says Mintoo Bhandari, Apollo Management’s Senior Partner and MD of its local affiliate AGM India Advisors.

For Bhandari, this is the second stint in Indian private equity space. Before joining Apollo in 2006, he had worked with The View Group, an India-focused private equity firm investing $1-$3 million per transaction. Bhandari had initially worked with the Indian government, especially the Ministry of Finance, as part of a Harvard group advising the government during the liberalisation. He had also worked with Harvard Management Company, which manages the endowment of Harvard University.

Apollo has closed two transactions till date since starting its operations – $100 million in DTH service provider Dish TV India and $350 million in two Welspun group companies. While its 22-month-old investment in Dish TV is currently at 2x, the investment in Welspun Corp has come at nearly 50 per cent premium per share. But Bhandari is not worried. “We believe that the blended entry price we were able to create at Welspun is very compelling and it compares very favourably to other private equity deals done in India over the last decade,” he explains.

In an exclusive interview with VCCircle, Bhandari speaks about the Welspun investment, Apollo’s India strategy, his take on the changes in SEBI takeover code and delisting norms, and the country’s credit and real estate market. Excerpts:

What attracted you to invest in Welspun? How did the transaction come about?

Our approach in India is focused on certain sectors. These are the sectors which Apollo knows well globally and therefore, we are confident of adding value to those here in India. These sectors include chemicals, oil & gas, metals and mining, financial & business services and media distribution. In our deal flow development, we tend to be very outbound-oriented and try to stay in active dialogue with promoters in these sectors. One of the characteristics which attracted us to Welspun is that it operates at the intersection of two of our larger focus areas – metals and oil & gas.

For a year or so before the investment, we were interacting actively interacting with BK Goenka. At that time, he was looking for capital and support to undertake a backward integration related to his principal business. Welspun’s principal business is the manufacture of large-diameter oil & gas pipes, used to build pipelines for transporting oil & gas, generally over long distances. The difficult terrains and environments that these pipelines must traverse and the pressures they have to withstand create a very high technical bar that puts a premium on technical excellence. The need for technical excellence and reliability was highlighted during the BP oil spill. Of course, no Welspun pipes were involved but the incident generally sensitised the public to the need for fail-proof, high-quality systems in the oil & gas space.

Technical excellence was a key area when we assessed the company. We had heard it from numerous industry participants and we also verified it from some of Welspun’s customers that the company produces superior quality pipes. In fact, some customers referred to Welspun’s pipes as the “gold standard in the industry.” There are further proofs of the company’s superior technical skills and capabilities. Welspun has produced pipes for some of the most challenging projects in different parts of the world, including pipes for the world’s deepest pipeline project (Independence Trail, Gulf of Mexico), the highest pipeline (Peru LNG) and the heaviest pipeline (Persian Gulf).

Another thing we considered was that Welspun is very well known for its customer service. There are very few CEOs in the industry who go out of their way to ensure personally that their customers are happy and BK Goenka is one of them. One of the factors fundamental to the investments which we pursue in India is that we seek to ensure that the promoter we are backing has a vision similar to ours. He needs to be focused on creating meaningful value and committed to continuous improvement. We have that in BK Goenka. He has a big vision and great personal drive to achieve a tremendous amount. Last year, the company achieved 19 per cent EBITDA margin, one of the highest in the industry and very exceptional for a metals business, on approximately $1.7 billion of revenue, but he is not satisfied. He wants to build a more global, more efficient company – a genuine market leader – and he has many focused, thoughtful ideas on this subject. Part of his vision is to improve margins further and he believes that one way to accomplish this is through backward integration, which will lead to greater stability of supply, greater control over quality, better margins and ultimately, as we hope, a more dominant position in the global market.

If I can summarise what excites us about Welspun, it is the unique combination of positioning and potential. Today, the company is well-positioned as one of the most cost-efficient, largest-scale, highest-quality players in the global oil & gas pipeline market. And some of its potential can be realised through backward integration and consolidation in a market that is still fragmented and has few focused and committed players. Also, Welspun has great leadership and a deep, capable team committed to continuous improvement and accomplishment.

One factor that also distinguishes our approach to investing is our focus on value. Apollo is fundamentally a value investor and in a high-growth environment like India, that translates into being a contrarian investor. We believe that the blended entry price we were able to create at Welspun is very compelling and that it compares very favourably to other private equity deals done in India over the past decade.

Do you think backing holding companies or a 2-3 promoter group company is a more interesting proposition for larger funds?

To be a successful investor in India, we believe that you have to have both a good promoter and a fundamentally good business.  One of the elements that we look for is the quality and depth of management, which Welspun has in abundance.  On the business side, we are looking for businesses that have genuine, sustainable advantages and that we are confident are well-positioned for the long run.

As we are in a hyper-growth environment in India, every company can look well-positioned. So, at times, the hardest work is to verify that a company is well-positioned in reality and that it is not just the rising tide that is colouring our perception. However, it is not as easy as it might sound; it’s a big challenge and requires substantial effort.

If there are additional opportunities and companies that fit these criteria within a promoter group in which Apollo has invested, it obviously is easier to pursue an investment in them as we already have the comfort level and confidence in the promoter and the team.

What are the sectors that Apollo Management favours? Also, what is the sweet spot for your investments?

We are fundamentally a value-oriented and often contrarian investor. We often say that we want to get compensated in valuation for taking on complexity and for investing in sectors in which other private equity firms have less expertise. When there is an attractive but complicated and challenging situation, we believe that Apollo’s investors can get compensated for that complexity as most private equity firms shy away from such situations and generally don’t focus on the industries which pose such challenges.

Some of the sectors that we focus upon, partially for the reasons I have just mentioned, are chemicals, oil & gas, metals and mining, financial & business services and media distribution. Today, Apollo is a leading investor in the global chemicals industry and a very meaningful investor in the rest of those sectors as well. In India, we will focus on these sectors because we believe that we can add meaningful value to those and also because we believe that it makes sense here from the perspective of comparative advantage and the economics of the value chain.

Apollo invests from its $14.7 billion global fund. And we would like to see a minimum of 1 per cent of that amount or roughly $150 million, deployed in every transaction. Typically, Apollo will look to invest anywhere between $150 million and $1 billion out of this current global fund.

Market regulator SEBI has recently come out with changes to the takeover code, increasing the open offer limit to 25 per cent. What do you think of it?

We think it’s a very positive, prudent move. The 15 per cent threshold was rather low and I think it had artificially created a differential between investor intent and regulatory burden. The reality is that investors are not looking to take over a company just because they would like to hold more than 15 per cent of its equity. The 25 per cent threshold seems much more rational.

The next steps that PE investors would like to see in the evolution of the regulatory environment are those that will allow us to help take companies private efficiently. Apollo never does hostile takeovers; we only do friendly deals. But given the regulatory process and the hurdles today, it is very complicated and somewhat impractical to take a company private in partnership with a promoter group. This is unfortunate because there are many companies that should not be listed and that would make a greater contribution to the economy if they were operated as private companies. In many such cases, it would be in the best interest of the public shareholders to offer them a fair and clean exit. But some regulatory changes are required to make this happen.

How does the deal-making environment look? Do you see more opportunities during this current uncertainty?

I would say that PE investment, in general, is somewhat cyclical. There will always be rise and fall in transaction volumes in sync with enthusiasm level and capital availability in the markets. Market swings in the USA directly impact the Indian markets and just like the USA, the velocity of transactions diminishes when there is volatility and downward pressure in the Indian markets. To be active under these conditions, investment firms have to be fundamentals-driven and contrarian. But it isn’t always easy, for organisational or other reasons, to pull the trigger when markets are choppy. The ability to execute when others are unable or unwilling to do so is a distinguishing characteristic of Apollo and has been fundamental to the firm’s long-term success.

Of course, private equity investments aren’t done unilaterally. Promoters must also be willing to transact in choppy markets. But we believe that the best promoters are those who put a premium on having the right partner, rather than a placid market.   

What do you think of the Indian PE market, compared to the Chinese markets?

India and China are probably the most important emerging markets in the world. But an investment firm considering these markets has to develop a carefully tailored strategy for each market, as they are very different. The one thing that they have in common is growth – both the economies are likely to grow into the foreseeable future. And the one thing that India sorely needs to sustain its growth and become more competitive is improved infrastructure.  Close to home, our portfolio companies may not deliver on their potential if the infrastructure does not improve. The world is going to get more competitive and efficient, and India must do the same if it is to develop its full potential.

That said, India has a history of and potential for leapfrogging. It is going to take a lot of capital, energy and effort, as well as the right regulatory environment, to build the much-needed infrastructure. And the fact that so many pools of capital in India are excluded from investing in infrastructure is not helpful.

Since both your investments are in listed companies, is Apollo Management more focused on PIPEs in India?

In India, most companies of any scale are already publicly traded. Companies, with as little as a few million dollars in EBITDA, can go public. So the opportunity to invest in sizeable private companies is much more limited here than it is in many other markets across the globe. There are a few notable exceptions, though, such as telecom towers, power, infrastructure and real estate, in which there are sizeable private companies and these sectors do appear to be in need of significant private equity over the coming years.  

Globally, Apollo is also very active in credit markets and real estate. Do you have any plan to bring that in India?

We have a real estate effort here and a team entirely focused on that sector. We are also looking at different opportunities in real estate space, but are doing so in a very measured manner. We think that there will be very attractive opportunities in the arena but they will have to be pursued carefully as the sector still has some challenges ahead.

We are also exploring and evaluating the credit markets in India. Generally, companies in India have very limited flexibility when it comes to designing their capital structures. They can raise equity and they can raise senior secured bank debt but there isn’t much available in-between. We think there will be significant benefits to companies if the market has a wide variety of options. We and many other private equity firms active in India recognise that there may be an opportunity in providing more flexible financing.


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In India, Apollo Is A Contrarian Investor: Mintoo Bhandari

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