How Blackstone made India its largest market in Asia

“Our philosophy is we don’t like to do small, discreet deals. If we like a particular thing then we do it in scale and a concentrated manner so that we can influence the outcome and we spend time and resources to make it work,” explains Parikh. 

Backed by a 18-member team, Parikh is now looking to chase down warehousing deals. He believes that with the introduction of the Goods and Services Tax (GST), builders are now focusing on creating large warehouses and, fuelled by the growth in ecommerce, warehousing will see significant amount of activity.

But residential is a play Blackstone hasn’t dabbled in actively as yet. “We have very few residential assets, but we have largely stayed away. In the residential prices have not gone up and the velocity of sale has been very slow. The entire sector is still grappling with a slowdown,” says Parikh.

For Blackstone, as Parikh puts it, the strategy is simple: They would like to own quality office space in the top six to seven cities; and majority control in partnerships is not something they agonise over. Besides Embassy Group, partners in India include Salarpuria Sattva Group in Hyderabad, Indiabulls Real Estate, Panchshil Realty, K Raheja Corp. Last December, it acquired a 50 percent stake in Indiabulls in two assets of 0.8 million sq ft in Gurugram. “Even though we [real estate] were slow to start, over the last four to five years the twin engines [real estate and PE] have been firing,” adds Parikh.

Meanwhile, as PE deal-making activity picked up pace, Blackstone began to internally change the way it was doing such transactions in India. Dwelling on the strategy, Dixit says, “...when we started in India in 2006 we had a diversified strategy but we don’t have that anymore. Since 2011, we have focussed on taking large equity stakes in a few select sectors, with a business builder mindset.”

That earlier mindset resulted in investments that didn’t play out, like the 2007 acquisition of Gokaldas Exports, which Blackstone eventually sold at a loss, and the 2011 investment in the deep-in-debt, loss-making Monnet Ispat.

Yet, it’s the business builder mindset that has helped Blackstone India deliver some spectacular returns. Dixit says, “The exit transaction value of the industry over the last two years has been more than $25 billion, which is equal to the exits that have happened in the preceding five years combined. The acceleration in exits is also why LPs [limited partners, or investors in a PE fund] are excited and Blackstone’s internal management is bullish on India. You are finally seeing money coming back from India and transactions of scale.”

The builder mindset also helps pull investee companies back on the growth path. Consider, for instance, the 2016 buyout, for $1.1 billion, of information technology firm Mphasis. For the preceding one and a half years, growth was eluding Mphasis. The deal structuring also included a master services agreement between the seller, Hewlett Packard, and Blackstone, in which the former committed a minimum revenue to Mphasis escalating year over year and totalling $990 million over the following five years since the deal date.

"We continue to be big believers in India. Our goal is to invest in high quality companies and properties, helping accelerate their growth by strengthening governance, deploying strategic capital and leveraging our global scale to drive operational improvements,” says Jonathan Gray, president and chief operating officer, Blackstone.

The first thing Blackstone did was to bring in Nitin Rakesh, a former Syntel head honcho, as CEO. The turnaround was quick: Between March 2017 and 2019, the company’s net profit has grown 10.9 percent and stands at ₹769.43 crore, with a reported revenue of ₹3,434 crore in March 2019 as compared to ₹3,018.55 crore in March 2017.

“We established a sales channel focussed on Blackstone-owned portfolio companies. Our guiding force for this partnership is consistency and transformation. We have about 10 Blackstone portfolio companies that we do business with aiding our revenue growth,” says Rakesh. He adds that Blackstone has also initiated and fostered strategic global partnerships (with companies like AWS, Dell and SAP) that are beneficial for all portfolio companies.

Information technology is one of the key sectors Blackstone has identified in India. The others include consumer, financial services, industrial (including auto components) and health care. Dixit explains they are largely sector-agnostic, “but if you look at the country in the last 15 years you will find that whether it is private or public capital, the returns have been from these sectors”. The focus is also sharply on B2B2C deals (business to business to consumer), a segment that feeds consumer businesses.

With the Indian banking system trying to clean up its debt overhang, most global investors are now seeking a pie of the bad loans. Last year, Blackstone acquired a majority stake in RBI-licensed International Asset Reconstruction Co Ltd and it has already bought loans worth nearly $100 million under this platform. The firm is looking to create a $250 million platform and a fund alongside it in the asset reconstruction space.

In December 2013, Blackstone had sold its stake in Pune-based drug maker Emcure Pharmaceuticals Ltd in a secondary deal to Bain Capital. Emcure was Blackstone’s first investment in India, and according to media reports it had clocked nearly three times returns from it. Since then Blackstone has not made deals in health care and pharmaceuticals, although it is vying to invest in that space in coming times.

A recent report from Bain & Co says Indian fund managers have consistently returned capital over the last two years, with 265 exits in 2018. It was one of the strongest years for exits in the last decade, although the 10 biggest exits accounted for 70 percent of the total exit value. The report adds that Blackstone recorded the second highest number of exits for 2018. This included the sale—the second one—of Intelenet Global Services Pvt Ltd for nearly $1 billion, a business it had bought for nearly $385 million in September 2015 from Serco Group; Blackstone had first bought Intelenet in 2007 before selling it to Serco in 2011 at a 3 times return. This makes it one of most profitable deals Blackstone has ever done in Asia. 

Much of the PE portfolio now comprises companies that deliver dollar revenues. The logic is simple: The firm has to provide dollar returns to its global LPs.

It was in 2011 that Blackstone took the call that India is ready to mature into a market for large, control-oriented transactions. Dixit estimates such deals account for a third of all transactions. Till date, Blackstone has done 13 buyouts, perhaps the largest by any global firm in India.

To benefit from this shift, Blackstone, which till 2011 had just 24 executives in India, hired 35 by 2018. Those were the blocks to build businesses. Blackstone has four to five important interventions to ensure growth in a business, after a deal. The first is to appoint board members, management and senior executives to provide that growth. The second is to install a management information system to ensure all management decisions are based on data. Other areas it focusses on are growth of revenue and productivity, of both capital and labour. 

It all begins, though, with the management bandwidth. For example, when Blackstone acquired the Chennai-headquartered DC motor maker Agile Electric Sub Assembly in 2013, it brought in senior advisor Jeff Overly, operating partner of portfolio operations at The Blackstone Group, to increase productivity (he left the firm this May). Overly, who spent 25 years at General Motors and Delphi Corp in operations and engineering positions, observed that the Agile Electric factory was dropping a DC motor every six seconds. The global standard, on the same capital and human resource, is three seconds and Overly succeeded in bringing it down to that in the Indian factory. In 2015, Blackstone sold its stake to Japan’s Igarashi Electric Works Ltd.

Overly, till he resigned, was advising Blackstone India on creating a fresh auto components platform. The firm believes there are huge opportunities in this fragmented space, where companies are unable to scale, which makes attracting capital and top tier management difficult. In April 2018, Blackstone India acquired automotive firm Comstar Automotive Technologies, and followed that up with 66.28 percent of Sona India to create a larger platform. Comstar, says Dixit, has doubled Ebidta since acquisition to roughly ₹500 crore, and is now among the top 10 auto component companies in India.

Once a company comes into Blackstone’s portfolio, it runs a 180-day programme on things that need to be changed. “The saying within the firm is cement hardens. If yesterday was same as today then what is the change?” asks Dixit, who has 18 years in PE, 13 of them at Blackstone. In those 13 years, the Indian arm has executed more than 80 M&A opportunities.

“The way they are organised today, their philosophy is, unless you don’t control the asset you cannot build value. Even in their real estate practice their Reit did well and they are continually buying assets. Under Amit, they have got their act together again in the PE business because there was a time in the middle when it was not as steady as today. And Tuhin, with his contrarian approach from the very beginning, has been able to build significant value for the firm,” says a senior banker.

While PE funds ideally look to flip investments in five years, building businesses calls for a longer holding period. Manwani says, “The thing we do differently is to bring a sense of urgency from the moment we close the deal. Even if the asset is held for a shorter period, all levers of value creation like accelerating revenue growth, operating efficiencies or capital productivity kick in from Day One.”

Globally, Blackstone commands nearly $512 billion in assets under management, a number that its peers are yet to catch up with. In 1987, Stephen Schwarzman and Pete Peterson raised $800 millon to strike deals through leveraged buyouts.

Over the last three decades, the fund has moved away from risky deals to stable investments across asset classes. In India, too, Blackstone has shown a similar maturity in almost 15 years by moving away from diverse smaller deals to bigger ones in select sectors in which it has more skin in the game. 

“India is about to embark on a renewed growth journey. I cannot stress enough on the role that financial services has to play here, and Blackstone is very well poised to add value by offering strategic guidance across the ecosystem of companies. Their ability of customising knowledge acquired across the globe to meet local needs has impressed me," says Uday Kotak, managing director and CEO, Kotak Mahindra Bank Ltd.

The connect with New York perhaps ensures that the investment philosophy seeps through to Mumbai.  Every Monday at 8.30 am IST, all Blackstone offices across geographies attend an hour-long meeting. It starts with the PE teams, moves on to real estate, then the credit business and finally the fund of funds.

Present from New York on these calls is 72-year-old Chairman Schwarzman, who sits through it all.  The meetings are a fertile ground for cross pollination of ideas and to leverage the strength of each outpost. It was at one such meeting that Dixit pitched Essel Propack, and others from different necks of the woods chipped in. As Dixit puts it: “Fundamentally, at the end of the day, investment is an art and not a science, and the art is in pattern recognition.”