Several foreign investors have been busy ‘Modi-fying’ their Indian market projections and aligning positions accordingly. However, only very few managed to have a ‘local’ perceptive as decisions have often been made in New York, London and other distant financial centres. But those who entrusted their Indian teams with the decision-making process have done far better.
Indeed, it is precarious to enter a market beyond competence as the success factors in Indian private equity greatly deviate from the large funds operating in Europe and the US where growth is a matter of access to leverage (adding debt to its companies) and extracting costs. In India, where interest rates are high, leverage is not employed. Here, it is all about how fast a business can be scaled up. However, while doing so, the country’s diversity and complex nature often get neglected. One has to look beyond the baseline forecast and understand the larger narrative.
There has neither been much room at the top for large AUM funds which have been fishing in a small pond for large deals. Although the pond is now expanding, there are some common misperceptions.
One, outside investors speak often of a so-called ‘emerging market risk premium’. Maybe a more accurate expression would be ‘ignorance premium’ since the long-term growth narrative in India is stronger than that of most developed economies because most of them have not addressed structural challenges or suffer from high debt. Expectations of extra premium are merely a symptom of distant investors not doing their homework.
Such investors may have other differentiators but if you do not have local process experience and if your local teams are not involved in decision-making, you will end up having high risks and that is why some foreign investors have had sour experiences. The learning is to take a fresh look at India’s modern ecosystem and acknowledge that one has to invest full-heartedly in building a local platform with a long-term horizon. There is no quick buck to be made here.
Two, while looking at India, many foreign investors use a stereotyped and uniformed analytical approach which is triggered by the expectations derived from known advanced markets, drawing parallels or comparisons with modern industrial giants such as Coca-Cola, Volkswagen and the like. And the fault lies therein, as these corporations did not produce the Western industrial revolution but are rather its end product.
On the contrary, India’s many family-owned small and medium entrepreses (like the famed German Mittelstand) are the country’s game-changers and hence should be factored in while spotting opportunities. As a result, if you run a filter through valuations of listed Indian companies, you will notice an excessive valuation gap between the large index stocks (where most outside investors have found comfort) and the SMEs.
Three, the unspoken ‘founder challenge’ has often been overlooked. Backing a high-quality promoter who shares the remaining investors’ view on organisational values and best practices is a key issue that is particularly relevant to India with its high ratio of family-owned enterprises. Much value has been destroyed by egos with a ‘my way or the highway’ mentality. Change has, rather than being embraced, become a bottleneck since loyal board members (which are appointed by the founder to not ‘rock the boat’) support and mirror the founder’s views.
In these cases, it is important for the promoter family to clearly separate the management of individual wealth, family wealth and company wealth. It is also important to cultivate humility in the parampara and establish professional performance reviews for all investors guided by guidelines which none can overrule.
Arrival of new investors also leads to many positives. Having been privileged of working in India for several years, I have seen how ‘strangers’ can see things with a fresh perspective and capture things that others can’t see, re-imagining the old and connecting the dots in a way that has not been done before. For example, we will not solve agricultural inefficiency by doing things as we have for the past 30 years – we need technological improvements and innovation.
These are certainly fascinating years to be in India.
Mathias B Pontoppidan is leading the cross-border desk at investment banking firm Cipher-Plexus Capital Advisors. Views are personal.
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