At a time when most of your peers are raising or have raised massive pools of capital, Bain is raising a smaller $5 bn fund — much smaller than what BX, Baring PE Asia, KKR has done for APAC. Are you bearish about the region?
We have a hybrid fund structure, which is comprised of regional funds as well as a global fund, and that actually gives us more flexibility. We can therefore do mid size deals but also do some of the biggest of big deals. We’ve done the largest deal in Asia Pacific, which was Kioxia, which is the former Toshiba Memory business, a $19-20 billion dollar deal. We think that flexibility is important to be able to address all the full set of opportunities in the Asian market.
For example in our fourth Asian fund we invested in JM Baxi, which you know, was less than a $200 million India deal, but also in Citius Tech, which was over $800 million and one of the larger ones in the recent times. And we did the latter in partnership with our global fund. Very few peers have a Pan Asian platform like ours or this hybrid structure.
How’s the world looking from your hot seat?
Europe’s facing a number of, a number of challenges, both geopolitical and macroeconomic.
The US also in many ways is seeing a macroeconomic paradigm shift. For a long time there was a paradigm of quantitative easing, with low interest rates and ever rising equity markets. Now we are shifting into, a very different environment with higher inflation, higher interest rates, and potentially more sustained challenges in the equity markets.
Asia is different, partially because it is diverse. Many of the markets and countries in Asia are not necessarily correlated with one another, nor are they fully correlated to the US and Europe. Not to say that they’re completely immune from global issues but they have different cycles. And they are also relatively large, and have strong domestic markets that can keep them going.
Take a country like Japan for example. You know, it used to be the case that Japan was very export driven market, but now it’s got a large domestic economy and has a big saving surplus. And so it doesn’t have the same peaks and troughs that you might otherwise have seen. I’m sure we’ll talk a lot about India, but, you know, India is benefiting from a number of secular trends and some structural changes in the economy. These are beginning to pay dividends and also helping is the fact that India didn’t have the same scale of fiscal and monetary response to Covid.
Separately, some of the Asian economies came out of Covid later and so there’s still some rebounding in progress. So some geographies, like Japan, are still not at their pre covid levels of economic activity, and so there’s still kind of rebound potential.
Would you say India is an outlier?
I think India has the potential to show the highest growth in GDP, in the next 12 months, maybe anywhere. I might be missing some small country, but 6-8% GDP growth at India’s scale will be unique and China’s certainly not going to grow at that level.
I think despite some headwinds on trade imbalance and current account deficit, India’s macro-economic situation is improving and is poised to structurally improve further with the China plus one strategy and the manufacturing push via PLI type programmes.
How does volatile currency markets impact investing?
Well, the challenge obviously is that the cost of capital locally has always been quite high as has been depreciation over time. And so we’ve selectively used hedging the currency whenever it made sense. However, I think for our India investments, it also has been more of the portfolio approach of how you do, balance of investments that are structurally short on the rupee. Since a lot of the IT services, pharma, export, manufacturing, export, benefit if the rupee depreciates, we have selectively focused there.
Amit Chandra: Currencies across Asia have been quite volatile. Japan, which everyone thought was quite a stable currency has seen a lot of volatility as well recently. Compared to the Japanese yen or the Australian dollar, for example, the rupee has remained quite flat over the last five years.
Has India been a big beneficiary of this China one, China plus one strategy, or is it still more Taiwan, Vietnam, Indonesia that has gained more in comparison?
The first thing I’d say is it’s early. The first thrust was geopolitical with Trump and China, and then you had Covid, which caused people to really rethink supply chain diversity. So it’s all been pretty recent. I would say perhaps some countries in Southeast Asia were the first to benefit, but mainly that was because they already had plants on the ground. So it was about taking their capacity utilization from 70% to a hundred percent and maybe building a bigger plant where one already existed.
Whereas in the case of India, it is about building afresh – new buildings, new facilities. Some countries in Southeast Asia, that infrastructure was already in place and so was the government support for capital intensive industries and like semiconductors. Malaysia and Singapore for example have had pretty well developed government subsidy and support programs for semiconductor facilities. People do realise India is a huge market in its own right. So unlike many of the Asian tigers that thrive on exports in India you could be making for both India as well as the world.
You, also referred to PLI, scheme. Is that also attracting investors a MNCs?
I think it is increasingly doing so. It is a well-funded programme that the government is committed to and is focussed on hi-tech and manufacturing companies. So yes people have taken note and there is a chatter. But these are early days. Many are commitments and some have just broken ground just as we speak, right? . If you just extrapolate the commitments, there will be a meaningful lift on virtually everything starting from GDP to jobs. And new ecosystems will get built.
Amit Chandra: Electronics is a good case in point where by our estimates, India is going to leapfrog from $18-$20 billion to $80 billion over last 5 years, and that number, based on all the commitments, could go up 4-5 times over the next 5 years.
These are quantum shifts that we are seeing, which will actually spur very interesting opportunities and will bring down the trade deficit. Oil and fertiliser are the two headwinds that can upset the maths but then again oil is coming down though gas prices are high and are negating the gains.
You have also raised a $2 billion special situations fund. How much of that will flow into Bain-Piramal India Resurgent Fund?
That is a separate pool of capital and both are investing simultaneously in India.
The Bain Piramal India RF Fund first fund was around $650 million, is nearly fully deployed and has done really well. So, they have had good deal flow and a few good exits, with a few more coming up. There will always be opportunity in that space in such a huge banking system. It’s in fact much tougher for mainstream investing where even in times of strong growth you know it is pretty crowded.
India RF is thinking of a much larger new fund.
Many would argue that the really big bankruptcy cases — Essar, Bhushan Steel etc are behind us now. What is left are the second, third rung companies which are truly broken. Is there a play left or are you expecting a down cycle staring at us and this is the good time to gear up for the next 12-24 months?
I think in the case of India, there could be some secondary effects from global markets hitting Indian companies. And you might also have some businesses that are particularly dependent upon healthy export markets to survive or are more exposed to commodity prices. Therefore, there will be some pressures in pockets of a large system and some companies m me ay need some form of capital to grow, or in the form of rescue capital, or it could be stressed or, or distressed.
But the bigger point is the new bankruptcy code and all infrastructure around, that is relatively new has made it all a transparent process, a more streamlined process and is going to provide for a greater flow of actionable opportunities than what we’ve seen in the last five years. So, even leaving aside any cyclical opportunities, I think just the fact that now there are more companies could kind of take advantage of the bankruptcy code, or I know and it is going to lead to more opportunities.
We have deployed $600 million -$700 million in the last 12 months in special situations alone in India. Overall across PE, special situations and other pools, we’ve deployed close to $2 billion in the same period.
Just to, for clarity, want to understand how do you like segregate credit, special situations, distress, bad loans?
Bain Capital Credit is encompassing special situations. They also have some other kinds of liquid credit like publicly traded, high yield bonds but that’s not very relevant to the India market. But within that arm we have got ability to invest in both stressed and distressed type situations.
In the case of India, we’re doing that largely through this joint venture with, the Piramal group. You have kind of mezzanine financing, which would come at a higher rate types but would be junior financing. And then you have these kind of structured equity solutions we talked about that are very bespoke to fit special need. And then the opportunity to purchase some non-performing loans from banks. All those products are in what’s called Bain Capital credit.
When we thought of India, we started with pursuing private equity opportunities, which includes buyouts and large minority positions. The Piramal JV which is more focused on stress and distressed. And then the special situation’s part of credit is that we talked about. Real estate will also be included, included in that area.
To help you quantify we can say from the various global pools of capital, $10 billion will be available for India to be deployed across asset classes over the next few years.
Typically a fourth of every fund that you raise so far has been deployed in India. I mean as far as 20 – 25%, Right? So, is that something that you think will go up or significantly come down, or be the same?
I would think it would go up and it would at least be at that level or grow based on the flow of activity we have been seeing in India. With that kind of growth, India is becoming more prominent for sure.
Overall, now that you look back, I mean, how has India been for you and the firm?
It’s been a strong market and a strong contributor for sure. Ever since we started here, we have had a pretty clear set of the industry sectors, and the types of opportunities. We also focused on those which were really good fits with our model that leverages our industry expertise, are global platform deals like Genpact and Hero. We have preferred deals where you needed to have strong local presence, the ability to work closely with Indian management teams, but we could help them expand their global operations and help them expand their global sales.
In the case of Genpact, we really got to interact with the company both in India and the United States, where the management was located and it was listed. And it hit a sweet spot for our platform approach.
So will I, will we be wrong to say that tech, tech services, pharma has actually been the best sectors for you?
Tech services and pharma(Emcure), but I would add also say we like the deals we have done in financial services and industrials too .
But financial services one can argue has been chequered. I mean, L&T Finance, the stock price has been flat since 2018. Similarly, Axis also has had its ups and downs…
Amit Chandra: From our perspective, while we would have liked to see it do better, we have done fine since we sold a small portion our stake in L&T Finance for most of our investment value long ago. Axis we came in at sub Rs 600/share. Now it’s around Rs 750. Importantly the bank is growing its book value in the mid-teens and seeing strong growth.
Now, from the point of our entry to the point that we are today, the fact that these companies actually leveraged the capital that we infused, managed to survive a Black Swan event, actually standing today with a much higher ROE, a much greater, you know, capital adequacy ratio ratio.We must not forget that both these investments were hit by a black swan event in the form of Covid, which impacted the financial services sector the hardest.
My question was, do you feel that pipe deals in listed companies with minority stakes are far riskier in India?
It is not just an India question, right? This is just the nature of that type of investment, whether it’s the United States or any other geography. I think you have to be incredibly clear on what your investment thesis is, the company you are backing in terms of, management and what’s the level of engagement that, that you’re getting.
A lot of, lot of your peers, say they prefer structured trades especially in listed companies with downside protection than pure vanilla PIPE. Is that something that Bain would also want to pursue more?
Pawan Singh: If it’s too structured then there can be an overhang on the stock. And so it’s not necessarily always good for the ultimate outcome you’re seeking. But as one of the tools in the toolbox, sometimes, such structured solution could work. But then again, not all structures are created equal. Right? I think some structures, whether it’s downside protection, whether it’s very sort of narrowly defined ways to bridge differences, I think work. But we’ve generally not been fans of very broad structures cause we think they create a bit of misalignment between partners, and often no one’s happy at the end of the day. So we’ve tried to do transactions in a way where we have as perfect alignment as possible with our partner, as opposed to highly structured deals.
TPG, Blackstone, KKR, Advent etc have a growth fund that is looking at venture style or early stage investing. What is Bain’s thinking around it? India has a very high number of unicorns. Today most of them need money.
So we do have a couple pools of capital that look at that part of the market. And so there’s Bain Capital Ventures and Bain Capital Technology Opportunities. Ventures is doing more early stage venture deals, traditional ones and Technology Opportunities would consider more growth kind of growth capital. We are looking at opportunities in the Asia region.
Did Indian valuations make you stay away?
You know in the last several years, valuation was a challenge for every geography. Again, I’m not singling out India because the United States and China had extremely high valuations. I think we took a sceptical eye to those valuations everywhere. And now you a major revision. I think, I think this could be a really interesting opportunity. India’s got an incredible number of innovative companies. I think a number are going to need capital and so it’s one of the sectors, one of the sub strategies that we’re, that we’re focused on.
So over the next four or five year period, what is the quantum of investment that we potentially looking at?
I would say if we have deployed $2 billion in the last 12 months, then $10 billion if not more.
It’s a large economy. We’ve got the capital, we have the capital base, we have the people.