As a private equity veteran, do you feel that the era of easy money is over?
XD – Well, clearly, we’ve been in a very low interest rate environment for many, many years. And that has changed in the last year-and-a-half. Investors like ourselves have to adjust to this reality that we are going to be in a higher rate environment for quite some time. That adjustment is continuing. But we see the first signs of stabilization. Nobody’s saying the battle with inflation is over. But it seems that the upward trend is decelerating or peaked or near-peaked. For us as investors, the important thing is really in this kind of environment with higher rates, how do we think about asset price. You know, simplistically, you can say higher rate means higher discount rates, and therefore, valuations should be lower. There have been some corrections clearly in the public markets and we are starting to see that in the private markets as well. But it’s too early to say that equilibrium has been achieved in terms of asset value adjustment in this type of interest rate environment. So that’s like a global backdrop for investors. But, of course, Asia is in a very, very different place, very different cycle. In all these important considerations, the most important theme for Asia is growth, not when inflation or interest rate will peak or about recession.
We’ve seen a sharp correction both in public and private markets when it comes to tech stocks. Do you still think that there is room for correction for tech companies and do you see corrections across other asset classes as well?
XD – It’s very hard to say if there will be or not more meaningful valuation correction for tech or for other companies. It feels like it’s closer to equilibrium. But I will say valuations are not cheap. When we look across the globe, when we look for deals, they’re cheaper than before but not clearly cheap. Some sectors or some companies are still expensive. Overall, I would say we’re still at a little bit of elevated valuation.
One of the sharpest changes in recent times has been in globalization. To what extent do you see the decoupling of supply chains, China-plus one strategy, play out?
XD – The impact of Covid disruptions on global supply chains increased the awareness of the cost of outsourcing if the supply chain is too concentrated. But, the bigger factor at play, in my view, is the growing sophistication, the growing scale of domestic economies in China and in India, and the growing sophistication of India’s manufacturing capabilities that drive supply chain configuration. And if you go further, the development of infrastructure and the stable business environment in India, that enables or positions India to be part of this dynamic process. Whether you call it deglobalization or more of a diffusion in terms of where the global supply chain configuration is, I think all these factors I mentioned need to come into place for it to happen, you can’t just wish or will into it.
What has surprised you the most about India, is it the public spending on infrastructure? Or is it the spirit of entrepreneurs?
XD – When turnaround time at Indian ports went from two-and-a-half months to seven days and eventually to two or three days; or India’s average train speeds go from 20 kilometers an hour to 40 to 80, that makes a huge difference, not just for the supply chain, but for India’s whole economic structure. The mobility factor of production and ever-increasing productivity gains will spur long-term, sustained growth. We have seen all these things play out in China in the last two decades and these are necessary conditions, maybe not sufficient conditions for growth, but necessary conditions for growth for the economy of the scale of India. People talk about India Stack and about digitalization and how 800 million people are on the digital platform and their most basic needs are being met through digital tools. All these set the greater context for why to invest in India. And I think, in the last five years, we clearly see more of a step change in that growth, not just because India’s GDP growth has gone through a step change, but when you look at the increased scale and complexity of the economy, the scale of the companies, and the growing number of more capable and driven entrepreneurs, the much more enhanced management qualities, they all seem to have made big changes in recent years. So that really positions us well, for the next five to 10 to 20 years, because we think all these factors will continue to only improve from an investor’s perspective.
What is the room for improvement for policymakers in India?
XD – A favourable, stable business environment, regulatory environment, and supportive government policies, are very important. India has made so much progress under Prime Minister Modi and we hope these changes continue. I believe the worst thing for global investors is a bad business environment, and bad or unfavorable government policies. A close second unattractive environment for global investors is unpredictability, or volatility, in terms of changes in business environment, regulatory environment, or government policies.
It’s been a milestone year for India – becoming the fifth largest economy and the most populous country in the world, and it’s a historic moment not just for India but for the world. There’s an expectation that India will, in the foreseeable future, become the third largest economy. So this is only the beginning for FDI for India. You won’t have scarcity of capital coming into India, if India can create the environment for investors to feel confident, comfortable. There is a commentary that India is somewhat following the China model vis-a-vis creating national champions, and that is not necessarily a great thing to do in the context of attracting foreign investment. Do you see similarities between what China went through and what India is going through now in terms of concentration of power or influence in some of these national champions that we’re trying to project?
XD – I think national champions have captured a lot of people’s imagination, but their importance in the economy is not that significant. If you look at the Chinese economy –– and we’ve been investing there for 20 years when it went from one-and-a-half trillion to 17 trillion ––it was not because of a few national champions. They’re very small relative to the economy. In my view, what really drives economic growth, ultimately, is broad-based corporations, large corporations and small medium enterprises. Those entities really create the most employment, create the most demand. Even in India, when we invest in IT services companies, healthcare companies, and consumer companies, they may not be the biggest of companies, but may be fast growing, of scale, and they create jobs. I think those are the things that really drove the economic growth of China, and will drive the economic growth of India. So I don’t think India will need to worry about concentration of resources into national champions. What’s more important is creating the environment where the vast class of entrepreneurs can really thrive, and can focus on developing and growing their businesses.
You have invested over $5 billion of equity in over 40 transactions in India over 18 yrs. Unlike others it’s only been PE and not real estate or credit, etc. Some would say you have been conservative and only recently you are getting more aggressive. Is that a fair assessment?
XD – In my view, where we have been very successful globally, in Asia and India, is the private equity business. I think in the private equity business, we’re probably among the biggest investors in this country. We have not been big investors in credit or infrastructure, at least for now. But that doesn’t mean we won’t. But I think where Carlyle has found its sweet spot in India is really in growing our private equity business. Carlyle is one of the biggest private equity investors in Asia and around the world, and India is a very important component of that. And it will become more and more important in the coming years.
What sectors do you think are poised to do well in India?
Amit Jain: We started with financial services, and then built out our healthcare, technology and consumer sectors over the years in India. Looking forward, we see that India is set to find its own space in manufacturing, globally. So we hope to do more industrial and manufacturing sector deals going forward. Overall, we think of India themes in two big buckets – India for India businesses and India for the world.
India for India at the sectoral level would mean –– healthcare, financial services, which have been favourite sectors for us, and also consumer. And on the India for the world aspect, we think there are spots where India has competitive advantages including in IT services and pharmaceutical exports. We already have a meaningful exposure in these sectors and hopefully increasingly, we’ll also do advanced manufacturing for exports. I would like to add that at some level, the market has become reasonably sophisticated and talking about just these broad sectors is good, but not good enough. You really need to be much more nuanced about sectorial thesis now.
Many of your peers are being flexible in terms of the types of deals – growth, minority, whereas we see Carlyle now more active in the pursuit of control transactions, buyouts. Do you have a preference for control deals?
Greg Zeluck– Doing control deals allow us the ultimate flexibility, whether it’s around capital structure, management team selection, ability to do M&A and exits. The value creation playbook that you can execute on is within our control. Those are really great opportunities. Having said that, I think India has had a fabulous culture of entrepreneurs, promoters, growing companies from very thin capital bases that they’ve kind of bootstrapped themselves into. And what we’re seeing with infrastructure and business changes in India, these are just catalysts and enablers to really unleash the power of these entrepreneurs and promoters. Backing these folks through minority deals, will for at least the foreseeable future, be another alternative means of investing in India’s future because I think some of these folks are just so dynamic, so driven. So, we anticipate doing minority deals in India, under the right constructs and with great partners going forward. But, we would like to do as many control deals in India as possible.
Other firms have branched into credit, real estate, and special situations. Any such plans for Carlyle?
XD – Carlyle’s investment philosophy has always been, we want to build the team, before we do the deals. We’re not about parachuting in and finding pockets of opportunity just for the moment. I think people have lost a lot of money by trying to do that. So, for us, it is important that we build out those teams. And there’s an effort underway to look at how to build the teams in all these areas. And the other part is that private equity still has a lot of room for us to play and a lot of our mindshare is really into private equity, because we’ve done so well. We think this is the right moment for us to continue to expand that effort.
Are you looking at opportunities in the government privatization program?
Amit Jain – It depends on the underlying asset. We don’t have a particular preference or lack of it in terms of who the seller group is, as long as it’s ethical, it’s legitimate, and it’s the right transaction under the laws of the land. So, I think we are very open, but it does come back to the sector, does the particular investment fit the sub-themes we are pursuing and if we have the ability to add value there.
You have invested in a few new age tech companies. Are you still confident of the prospects of these young tech-enabled companies?
XD – There is much greater scrutiny of the unit economics model. Historically, a lot of these companies claimed they have a profitable unit economic model –– just give me scale, and it will be profitable. And in my view, a lot of it has proven not to be true. And a lot of them burned through too much money. I think the market correction is probably justified. There were clearly a lot of hyped business models that got financed, and I would say people got burned. But we live in a world of innovation and my view is that India has so many smart people, a big domestic market, and smart consumers that there are going to be a lot of these innovation opportunities. We will be continually on the lookout for these opportunities. Right now, it is challenging for new companies to raise capital. And that is globally true, not just an Indian phenomenon, that people want to take a pause and figure out what businesses really justify being given a lot of capital. It’s not a winter of ideas but a winter of capital, but there’s always going to be spring.
Are we also going to see more advisors like Aditya Puri come on board, mentor companies and CEO of portfolio companies?
XD – Well, it’s not often that you have an Aditya Puri. But there are other folks embedded in some of India’s best companies — whether it’s in the IT services space, whether it’s in some of the big pharmaceutical companies — and they add immense value to the Indian portfolio as well as the global one. The key is to find people who can really add value, whether it’s sitting on boards of our portfolio companies, whether it’s in helping our team and understanding business models, whether it’s in networking within India.