Why global investors should go full-throttle on India

by Sanjay Nayar

A financial services sector expert lays out the factors stacked in favour of India as a hub for foreign direct investment (FDI).

India is undoubtedly one of the world’s most impressive growth stories today, and is an economy that global investors can ill-afford to ignore. We at KKR have been investing in India for almost a decade and continue to be excited about the country’s future trajectory.

The last 10 years were amongst the most benign for the global economy. With expectations of hardening commodity prices and interest rates, the global economy seems to be close to the peak of the cycle. But while this next phase could bring new risks and challenges, India remains a long-term structural growth story for KKR.

By enacting difficult reforms such as the Goods and Services Tax (GST), Rural Estate Regulatory Agency (RERA), the new bankruptcy code among others, the Indian government has started laying the foundation to harness this country’s immense potential. India watchers remain optimistic that the economy is poised to achieve a consistent 6.8 per cent GDP growth.

However to sustain this level of growth, India’s inherent savings-investment gap will need to be addressed. The government has traditionally been the largest recipient of India’s savings, which often creates a capital constrained environment for the country’s dynamic private sector. This need for patient, long term capital represents an attractive opportunity for global investors.

Besides being providers of capital, global investors can also play a more strategic role by helping Indian companies access new markets, exposing them to global best practices, to help them reach the next level. This approach of being more than just capital providers has always been KKR’s philosophy, and we are happy that Indian entrepreneurs have begun embracing it.

Over the years, Indian businesses have increasingly seen the value in our approach of helping local players become global champions. Entrepreneurs today are not only willing to enter partnerships with international investors, but are also welcoming of the intellectual capital that we bring to the table. Specifically, private equity’s expertise has become more relevant than ever as Indian business groups face the challenge of deleveraging and succession planning. I am confident that these considerations will drive even more private equity activity in the country in 2018 and beyond.

Furthermore, Indian companies have growing ambition – and potential – to thrive internationally. In order to expand overseas, Indian companies must reach global business best-practices and standards. To achieve this, they benefit from teaming with global partners and investors who can apply their experience in other markets to help these companies raise their game to be on par or better than global peers. This has opened the door for private equity investors to start a conversation with Indian entrepreneurs, and that door continues to widen.

As a provider of flexible, patient capital, we at KKR take the long-view when it comes to success. Our approach is to seek partnerships where we can provide growth capital and partner closely with entrepreneurs with a track record of success. In addition, we provide unique value-add capabilities beyond our money – post-investment, we roll up our sleeves to identify new initiatives that can drive top-line growth, improve organizational efficiency, enhance talent and optimize capital efficiency over the long haul.

As a leading private equity investor, we have the ability to leverage the strength and expertise of both our global platform and our local teams to assist Indian businesses. Our network of global resources, which consists of sector specialists, operational experts and advisors help businesses with everything from nurturing talent to supply chain management to environmental, social and governance issue management. We further rely on our India-based team of local experts who understand the many nuances of the Indian business landscape to marry our strong global platform and understanding of global best practices with local market knowledge and expertise. Through this global/local mix, we have the ability to invest in any part of a company’s capital structure and “connect the dots” to better inform our decision-making on India investments.

Our partnership with Alliance Tire Group (ATG) is a perfect example of our global/local partnership model. ATG is a developer, manufacturer and supplier of a wide range of off-highway tires. At the time of KKR’s investment in 2013, ATG was already a well-established industry player, but wanted to grow its production capacity, international reach and market share. Given our extensive operational knowledge and local expertise, ATG chose KKR as the partner to achieve its ambitions.

With the help of KKR’s operational partners in India, the UK and US, ATG was able to achieve enhanced sales force effectiveness, improved supply chain and manufacturing processes, upgrade its IT systems, and optimise its capital structure. These initiatives helped the company increase its global market share and it was eventually acquired by Yokohama Rubber Company, a global top-10 tire manufacturer, which has furthered ATG position as a leading global player.

That said, private equity is not the only form of capital that appeals to Indian companies. Alternative forms of investment such as debt financing have become increasingly sought out by Indian entrepreneurs. We believe that key sectors in the country such as real estate have a large need for capital, but are unable to access it due to challenging debt markets and a highly regulated banking system. This presents additional opportunities to provide capital in the form of senior secured credit and junior debt to experienced partners looking to fix their capital structures, complete projects, or honor commitments to existing lenders.

Unsurprisingly, debt has been an active focus for us at KKR in recent years. We have launched two non-bank finance companies to provide more access to credit to Indian businesses across a variety of sectors. These investments often require more due diligence and command a higher risk premium versus plain vanilla bank financing. However, between the growing demand for non-traditional capital by Indian companies and the inability of banks to meet existing demand, credit remains an exciting opportunity for investors

Considering this array of investment opportunities — where global investors can partner with innovative entrepreneurs, support companies’ domestic and overseas growth, and flexibly deploy much-needed debt and equity — India has indisputably developed into a hotbed of global investment activity. As the country’s macro environment becomes more business friendly, global funds are likely to have more opportunities to meaningfully engage with the local business community and provide funding that is pivotal to the success of Indian business.

I am confident that India is well-positioned to make even more notable economic gains in 2018, and private investors and Indian entrepreneurs will both have ample opportunity to partake in this exciting story

Sanjay Nayar is Member & CEO KKR India Financial Services Private Limited.

About the Author: Sanjay Nayar