Bharat Banka, managing director and chief executive officer of Aditya Birla Private Equity, was picked by Kumar Mangalam Birla to set up the business in 2009, when the sector was besieged by marquee names from abroad. Three years later, the PE has carved a niche for itself. In his earlier avatar, Banka, 43, who joined the group in 1994, was instrumental in some of its biggest merger and acquisition deals as head of group finance. In an interview with Dev Chatterjee, he talks of future plans and recent changes in the sector. Edited excerpts:
Aditya Birla PE has invested in a variety of companies, from restaurants to manufacturing. What’s your investment strategy?
To build a portfolio of businesses in each fund, with reasonable diversification in terms of risk, returns and exposures. The broad theme is sector-agnostic, as long-term growth in India is expected to be all-encompassing, barring the recent exceptions for some sectors being impacted by discretionary policy and regulatory intervention.
Accordingly, our investment managers maintain a fair mix of businesses in manufacturing and services. The core selection of companies hinges upon the potential to generate returns, manifested in the amount of potential for growth and margin expansion, besides the presence of ethical and dynamic managements. The icing on the cake would be where our investment managers get to be thought partners with our portfolio companies and benefit them with our networks, competitive intelligence and strategic and business inputs.
What's the rationale for your recent investments in Olive, a restaurant chain? Was it due to the recent listing of other companies in the sector?
The food & beverages industry is estimated to be close to $200 billion and is growing at a steady pace. In the broad Indian consumption theme, F&B (besides apparel) is huge by size and relatively more predictable in scalability, profitability and potential for institutionalisation. Within F&B and hospitality, the restaurants are a good proxy to benefit from the potential of changing paradigms of consumers on dining. The qualities in the segment that are important and key from an investors’ perspective are strength of brand, brand resilience, institutionalisation of operations and expansion, scalability and profitability. Hence the investment.
Your investors are expecting fair returns in an economy which is showing signs of a slowdown. How do you balance the investors’ expectations and lack of good opportunities?
The returns in any investment portfolio broadly reflect the underlying state of the economy at the macro level and the delta from the economy returns (i.e. a return over and above the inflation-adjusted rate of corporate growth) in a meaningful way is attributed to the selection of businesses in it. The returns a business would have generated in three to five years with a compounded annual growth rate (CAGR) of eight to nine per cent GDP growth would be dissimilar with a scenario where the CAGR of GDP growth comes down to five to six per cent. The fair returns in both the scenarios would logically be different and mature investors understand that.
Aditya Birla PE was set up when the world’s economies were in shock and very few companies were investing in new businesses. What are the challenges you faced while setting it up?
Our PE was set up about three years before, in one of the most volatile times, just after the 2008 meltdown and in an extremely uncertain environment, when investors were unsure of committing their capital to long-term asset classes, more so to illiquid alternate assets.
One also had to withstand the usual resistance relating to a new entrant. However, we were able to set up the practice and raise funds on the back of a combination of strong factors like an extremely respected Aditya Birla Group brand, the credibility built by Aditya Birla Financial Services, an experienced team at Aditya Birla Private Equity with individual investing track records and a product taken to the investors with the highest levels of integrity and customised features.
Many PEs are investing in the high-risk and high-return realty sector but your funds are keeping away. Why?
In the mandate of both the funds we manage, Fund-1 and the Sunrise Fund, the focus is sector-agnostic and their charter requires us to exclude hard asset-based plays like real estate.
However, the funds are evaluating multiple opportunities in the broader and extended areas relating to these verticals e.g. hospitality, health care, education, infrastructure enablers, clean-tech, etc, which we expect to have the potential to deliver superior performance as expected by the investors in these funds.
In general, what's your take on the Indian PE industry? Do you think the returns have been as good as the projections?
The PE industry in India has a serious vintage of less than a decade i.e. the time since international Limited Partners started participating actively in India-dedicated funds launched by PE investment managers, whether institutionally sponsored or individually founded by Indian investment managers. Until then, PE investing in India manifested through global funds. So, the meaningful action in the industry can arguably be claimed to have started less than seven-eight years before.
Some of the PE funds, though smaller in size, with vintage fund-raising in 2005-2006, have delivered good returns in the high teens and some have crossed 20 per cent.