Back in 2002, a few months after Bharti Airtel listed on the bourses (the then Bombay Stock Exchange and the National Stock Exchange), the telecom major had to deal with a crisis of confidence from its investors. Its stock price had tanked by over 50% leading to an erosion of faith from certain quarters, remembers chairman and managing director Sunil Bharti Mittal. “A much smaller investor with hardly $20 million in Airtel was fretting and worrying about its investment,” he tells Fortune India, contrasting it to his big-ticket investor’s unshaken belief. “Warburg Pincus put their arms around us to say, ‘Don’t even look at the stock price and just carry on doing what you are doing. We are not going to put any pressure on you just because our equity investment has been wiped out’.”
The U.S.-based private equity (PE) firm’s confidence was validated in 2005, when it finally exited its Airtel investment with a profit of over $1.8 billion. “The whole world was stunned,” recalls Mittal, “and then the private equity market [in India] just opened up.”
Significantly for Warburg Pincus, this show of faith also cemented its position as a go-to PE player for Indian entrepreneurs.“I think the key is learning how to survive success and failure since you experience both during the life cycle of an investment because life is never a straight line,” Charles‘ Chip’ Kaye, global co-chief executive officer, Warburg Pincus, tells Fortune India on a sunny, winter afternoon in Mumbai.“Everybody thought that it [Bharti Airtel] is some rocket ship. But the reality is... no one knows of half of Sunil Mittal’s critical times, and it’s in moments like these that we have to be deeply supportive.”
It is this intrinsic empathy for entrepreneurs that has guided Warburg Pincus in its 25-year journey in India: By staying the course through turbulence in several instances, it has gone beyond a deep-pocketed financier to a friend in need. In fact, in the backdrop of several high-profile acrimonious investor-investee relationships, it is almost a mutual admiration society between Warburg Pincus and its India portfolio.
His love affair has led the firm to take, according to industry sources, the next step in its relationship with the country: A special India-focussed fund, which is not usual for most marquee foreign PE players—they tend to typically invest from a common global- or Asia-focussed pool of funds. Meanwhile, Warburg Pincus has already raised a $2.2-billion China-focussed fund in 2016 as well as a $4.5-billion China-Southeast Asia II fund last year.
At this stage, this reaffirmation in its potential may prove as significant for India, Asia’s second-fastest growing major economy after China, as was the PE firm’s multi-bagger investment in Bharti Airtel in the early 1990s. That deal is widely considered instrumental in putting the country on the global map as an attractive destination for PE firms, says Mittal, adding: “Until then, a lot of private equity investors were afraid to invest in India as they felt it was difficult and were concerned about returns.”
Sure enough, PE investments in India increased from roughly $700 million in 2000to $37 billion in 2019. In a similar trend, as of 2019, Warburg Pincus had invested over $1 billion into Indian companies from about$100 million in 2000. “Our pace of investments continues to grow in India. The opportunity set has simply expanded and we will play into that,” says Kaye. “It is a place where almost everyone is underexposed, and as other investors begin to realise that India is where they can and should have more al-location in business, we are pretty convinced that we are the single best way to be able to do that.”
Analysis (based on conversations with experts by Fortune India) of the companies Warburg Pincus has invested in suggests the PE firm has returned consistently north of 20% to its investors over the years, despite the highs and lows of the investment cycle. In fact, several foreign funds shut shop in India after they burnt their fingers in the aftermath of the global financial crisis in the late 2000s, but Warburg Pincus showed no sign of budging.
On the contrary. True to the Warburg Pincus way, it became an insider, part of the environment it was operating in—for better and for worse—and that made all the difference.
One Size Does Not Fit All
Needless to say, it isn’t just love and semi-fresh air that has fuelled this harmony between the New York born-and-bred PE firm and India Inc. Warburg Pincus brings a wealth of experience and skill sets which, says Kaye, are valuable since it applies them in a culturally relevant way. “And I think lots of places [firms] don’t ever get the balance right. They either come in the way and don’t actually bring the benefits of scale globally.Or... they bring the simple way of doing business that works for them in the U.S. but it really doesn’t connect in a local sense,” says Kaye. Warburg Pincus relies on a local team(led by Vishal Mahadevia, managing director and head of India at the firm) that runs the show here and is able to appropriately guide their investees.
Take the case of Ecom Express. In 2016-17, the challenge-riddled e-commerce market was grappling with declining growth (to below20% from 40%-45% in the previous year), recalls T.A. Krishnan, director and co-founder of the logistics company whose client roster comprised e-commerce players. “Our biggest customer Snapdeal was going through a rough patch,” he says. “Although, we had expanded to17,000 PIN codes and had a fairly large set-up, our business was not growing because of regulatory changes and the funding environment. At this point, we [even] contemplated getting into a normal courier business.”
A conversation with Mahadevia proved fortuitous, he says. “We met Vishal at aboard meeting and he advised us to continue to entirely focus on our core e-commerce business. He pointed out we should take the growth slowdown as an aberration and continue investing,” says Krishnan, who took the advice on board and is reaping the benefits of the continued investment in 2017. His company now covers around 25,600 PIN codes, he says.
Simply put, blending with the ecosystem has helped Warburg Pincus give their investees what they need: enhanced value. At the same time, it has given the PE firm what it needs and wants: “Reference-ability,” says Kaye. That is, “people’s ability to talk to somebody about us—and if you want the answers to be positive you actually have to earn it”. Of course, this does not preclude looking after its own interests, he adds. “We can be tough when we need to be. But we need to recognise the environment we are living in.”
Warburg Pincus wants to be considered“the preferred place for entrepreneurs to look to raise capital”, Kaye says, and it seems to have achieved that: Several entrepreneurs tellFortune India that an association with the PE firm adds to the company’s credibility. Also invaluable is the firm’s ability to connect entrepreneurs with global experts and dip into a vast resource pool to optimise outcomes.“They have helped build my entire leadership team, right from finding consultants to actively participating in interviews,” SiddharathBindra, managing director of clothing retail brand BIBA Apparels, says. “They have access to the best people and that has helped.”
But that doesn’t imply intrusiveness, says Krishnan. Even as a majority shareholder, Warburg Pincus leaves the operational management of the company to the entrepreneur. “The good thing about them is that they back a team, invest money, and thereafter they don’t interfere or meddle with day-to-day affairs,” he says.
They can, however, be counted on to make their presence felt during the rough times. That, in fact, is their calling card. “People know we have been here not only in the good times but also in the bad times and that great stories and great fortunes are made when things are out of favour and not in favour,” says Kaye.
Not many would argue with him. Least of all Warburg Pincus investees.
On Team Turbulence
There is a recurring pattern of trust as evidenced by Sanjay Agarwal, managing director and chief executive officer of AU SmallFinance Bank. A little after Warburg Pincus invested in the company in March 2012, the stressed financial sector led to a slower growth rate for AU Small Finance Bank (sliding to around 10% in March 2013 from 40% the previous year). “I told Vishal that we had promised higher growth but we don’t want to grow at that pace because the market is not conducive,” says Agarwal. “He told me to do what is right for the organisation rather than what is right for them or what was promised when the market condition was good. That kind of conversation always helps build trust.”
As does the investor’s timely intervention in times of need, like in June 2017, when AUSmall Finance Bank was preparing for its stock market debut. On the day of the IPO’sopening, a circular by the Reserve Bank of India (RBI) barred foreign investors from subscribing to it since the bank had crossed the permissible limit on foreign holdings. It was a tense morning at the RBI office in Mumbai, Agarwal recalls. “Even though we had five or six other investors, only Warburg Pincuscalled in my hour of need,” he says. “Post our discussion we decided the solution was that one existing foreign investor sell about 5 lakh [500,000] shares in order for the RBI to withdraw the circular. Vishal organised this for me in three hours.” By the third day of the IPO, foreign investors were back in the fray.
This also points to a constant vulnerability for entrepreneurs: The timing of their investor's exit, in as much as what works for the private equity player may not be beneficial for the company and vice versa. For instance, when Lemon Tree Hotels had to delay its IPO from the promised deadline (2015) to 2018 due to poor market conditions and a slowdown in the hospitality sector. At that point, most PE firms would have typically pulled out but there was a trust between the two from the beginning, says Lemon Tree Hotels chairman and managing director Patu Keswani. “When Warburg Pincus invested in Lemon Tree Hotels (in 2006), we signed an investor agreement which was a few hundred pages long but in the 13 years that they were invested, I don’t think either of us referred to that document!” That gave him the confidence to request Warburg Pincus to not give up its entire 24% shareholding in the company. The PE firm took heed, and sold 12%via the IPO in 2018. “And, after one year, they asked me to find a buyer for [the balance 12%of] their stake as they didn’t want to suddenly dump the shares in the stock market because that could depress the stock,” says Keswani.
This sentiment of support is echoed even by blue-chip investees like Uday Kotak, managing director and chief executive, Kotak Mahindra Bank. The banker points to a meeting with Kaye in New York in2007 as one that changed the course for the bank. “Chip told me, ‘Uday, I think the world is going in a very funny place and if you get a chance, you must keep raising capital.’ Based on his input at that stage we actually went ahead and raised capital in November 2007,” says Kotak. “This was a fortuitous stand because after January 2008 markets turned weak. So as we got into the crucial phase post the financial crisis, we were well stocked upon equity capital.”
Once Warburg Pincus is convinced about the entrepreneur’s vision, it is able to play a growth catalyst, concurs V. Vaidyanathan, managing director and chief executive, IDFC FIRST Bank. “We started the company [Capital First] with a retail loan book of ₹94 crore in 2010 and built a proof of concept (POC)loan book of ₹2,700 crore by 2012, lending to people who were not filing tax returns,” he says.“We presented the POC to Warburg Pincus and they backed the idea for scale-up, and then we grew the book to ₹30,000 crore by 2018.”After Capital First’s merger with IDFC Bank, Warburg Pincus owns 10% in the merged entity. “Despite the fact that they understood that the transformation will take a good five years, Warburg Pincus supported the merger proposal with IDFC Bank and has been willing to stay invested as good institutional investors.”
This responsiveness to an investee’s needs helped Yogesh Mahansaria, founder of off-highway tyre major Alliance Tire Company(ATC), expand his company globally. “They were invested in ATC for a little over five years(2007 to 2013) when they wanted to exit,” he says. The PE firm discussed the possibility of an IPO, Mahansaria recalls, but he wanted to scope out M&A opportunities. “This becomes difficult to execute as a listed company, hence we wanted to stay private. We agreed we would run a process with other PEs to step into their role,” says Mahansaria. (KKR India eventually bought Warburg’s 80% stake as well as 10%from Mahansaria.) “Although they could have potentially got better value by trying to sell the business to a strategic investor versus another financial sponsor, they recognised we wanted to continue to grow the business.”
In Tune with the Times
Mahansaria, in a sense, represents the evolution in the firm’s investment strategy after its early bets on primarily established market leaders. Warburg Pincus had begun its India investment story in the mid-1990s with the likes of HDFC Ltd, Gujarat Ambuja (now Ambuja Cement), and Nicholas Piramal. But as the landscape evolved over two decades, so has its approach, with a fresh focus on ambitious professional entrepreneurs looking to build new-age businesses. “As the market continues to develop and mature, [so doesour] ability to think about another generation of ownership. I think the size and scale of what we are thinking about is growing,” says Kaye. “And an environment like the current one, which creates some difficulty and disruption, is the most healing, in some ways, from our vantage point as investors.”
As part of evolving investment approach, the PE firm has been working to create new entities with professional entrepreneurs. The next step is to identify opportunities for control of existing(largely family-owned) companies in the throes of corporate restructuring, says Kaye.
Even in terms of choice of sectors, there was a change in the aftermath of the global financial crisis (2008) when Warburg Pincusconsidered its opportunities in emerging economies. “The rise of the mass affluence seen in consumer and retail, healthcare, and financial services has driven our activity broadly,” says Kaye.
The fintech and financial services sector continues to be an investor favourite and Warburg Pincus is no exception. ThinkHDFC, Kotak Mahindra Bank, IDFC FIRST Bank, and AU Small Finance Bank. Its bets in the insurance segment include ICICILombard, SBI General, and India First.“This is a sector we like and continue to think as interesting as it is still underpenetrated, and still adapting to new technology,” says Kaye. As is logistics, an area of growth in the e-commerce wave, where it is invested in three companies: Ecom Express, Rivigo, and Stellar Value Chain.
At the same time, Warburg Pincus has stayed away from businesses typically associated with high cash burn, particularly in the domain of e-commerce. “Our roots are as more fundamental investors and thankfully some business models that have this extreme subsidy and high cash burn elements are just less of our thing,” says Kaye. This is not to suggest that Warburg Pincus has shut out investments in the e-commerce sector. “We invested in logistics and in a number of other business services that had knock-on effects on the economy. We can play a role and drive that without being an e-commerce investor ourselves,” points out Mahadevia.
Also, as a growth-focussed fund, Warburg Pincus doesn’t allocate money towards passive public market investments. “So where you can take a reasonable ownership stake and work with the teams and entrepreneurs to drive a much better outcome... that’s really our investing approach,” says Mahadevia. This is evidenced by the fact that the firm has bought more than 50% stake in at least half of its last 16 investments in India.
The “better outcome”, for any PE firm, is a profitable exit which allows it to return capital to its limited partners. Apart from the markets and the economy, this hinges mostly on the entrepreneur and the PE firm’s ownership of the business. “There’s no button to get in and out. You have to build a relationship with an entrepreneur in a way that you can live with him or her over a 10-year stretch and constructively find a way out,” Kaye says. “But there are very few things we do where it goes according to plan. We do our investments but it is never a straight line.”
What has to be on the straight and narrow is the entrepreneur’s standards of corporate governance. “We work with good entrepreneurs, high corporate governance, good businesses and... we have always invested behind strong management teams working within the complex system in India and with an understanding of how you do business out here,” says Mahadevia.
This puts them in a position to tap industry experts for course correction and resolution if their investees face setbacks or challenges. In many cases, they have also been instrumental in introducing new ideas and enforcing best practices in key areas of business management. Deepak Parekh, chairman, HDFC, recalls how Warburg Pincus helped build a “good” organisation. “They stressed that we need to attract talent, but more importantly we have to retain talent. They gave us examples of stock options and how the American corporations work and incentivise senior management,” says Parekh. Stock options were a new concept in India at the time.
It is a tightrope walk—supporting the entrepreneur's vision and looking out for its own returns—but Warburg Pincus has managed to find a balance by defying traditional wisdom. Kaye points to economist John Maynard Keynes who had said: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” And then contrasts it with Warburg Pincus’ choice to go in the other direction. “[Because] itis always easier to go with what the crowd thinks, much more difficult to take the lonely passage of your own conviction. Being a successful investor is about not falling in the power of the crowd. It is about having the conviction about whom to back and the courage to stand by it,” says Kaye.
That also sums up the basis for Warburg Pincus’ deep bond with India and, according to sources, the trigger for its potentially $2-billion India-focussed fund. The approach has been validated by the fact that the 25-year-old journey has “been relatively accretive to even our global returns”, Mahadevia points out. “And given the crossroads of the reforms and the technological disruptions, when you are looking from a digital perspective, it will create a whole new generation of entrepreneurs and companies. When we look 10 years from today, I think we will see a whole new group of different companies.”
That means: More relationships to be formed, change to be pushed through, value to be added. And, as Kaye puts it, “From how we sort of look at the world right now, at least a piece for a puzzle for us is embracing our long history of emerging markets especially in places like India.”
(This story was originally published in the February 2020 issue of the magazine.)