In 2006, Warburg Pincus took a big bet on Yogesh Mahansaria by investing in his idea of building a global off-highway tyre company. They backed his vision, and acquired two companies—Alliance Tire in Israel and GPX International in the US. In 2013, Warburg Pincus sold its 80 percent stake in Alliance Tire Group to private equity firm Kohlberg Kravis Roberts & Co. for $ 650 million, roughly four times what they had invested. Ashish K Mishra talks to Niten Malhan and Vishal Mahadevia, co-heads of Warburg Pincus in India, about the role private equity can play in helping entrepreneurs grow, the current PE industry landscape, and why they decided to back Mahansaria.
Q. Both of you are really well educated. And I understand that you would like to move around with people who share a similar background. When it comes to spotting an entrepreneur—in this case one who barely cleared college—does education prove to be a challenge?
Niten Malhan: I don’t think that’s true. It may change things in your social circle, to hang out with people who have a similar, but not necessarily educational, social track. You may relate to them more because you may have gone to the same place to study or have a similar mindset on what’s important. But when it comes to business and spotting interesting entrepreneurs, whether it is training or whether you are trying to evolve as an investor, the things that strike you about the guy is not the pedigree of education but the passion and understanding of the business, which doesn’t need a post graduate degree. It is a very raw and instinctive way in which they relate to a business, and that comes through in the way in which they describe it and the opportunity in the business. If that gets to you then you may articulate it and say what’s your thesis and drill down here and there, I don’t think the discussion ever starts with, ‘Which college did you go to?’
Vishal Mahadevia: To be honest, I didn’t even know he [Yogesh Mahansaria] has not finished his college degree. I would actually go the other way: The more polished someone is, sometimes it is adverse selection. I am not saying polish is bad, but you may get fooled by it and miss the actual substance underneath. The college degree or social standing or where he comes from, that’s not important to determine whether someone is going to be a good partner, good entrepreneur. And I will give you the China example, which our firm uses quite a bit. In China we choke, but if you are backing people who don’t know how to speak English, you are typically going to find the more Chinese entrepreneur, the one who knows his local market well, the one who is in there compared to the one who is very polished, speaks English, has studied abroad, came back and is raising money—he may not necessarily be a successful entrepreneur going forward.
Q. How accessible are you?
Mahadevia: The truth is, 24/7. Yogesh can call us anytime and he does call us anytime and it is vice versa. I would say that at the start we were talking almost every day. Now we still talk a lot, not since the transaction has been done. It is a partnership, not a passive investment like what you would make in the stock market. So you need to be accessible.
Q. You have invested in a lot of sectors. At any point of time, do you feel you are experts? Do you see your role as instructive of what an entrepreneur needs to do?
Malhan: One trend that you are hearing more often in the industry is the notion of operating partners; that there must be people you employ at PE firms who are actually experts in that area because they have spent a lifetime in that specific business or specific function. Like a supply chain expert, for example. And then you may, in that specific investment, put that person on that investment project and say, ‘Can you now help this company improve their supply chain?’ In my mind, that is no different from for example of engaging a consultant in that business. To say, ‘Look, we have a specific inventory or supply chain or procurement problem. Let’s identify someone who really understands this business, who can take this project and work on it.’ Whether it comes from a PE or a consultant, it doesn’t matter. To me there is a little bit more of that you are seeing in the industry.
The second is the issue of style: Whether as an investor you are more consultative and influence what needs to happen versus what you feel because you are a part owner or a majority owner and you can prescribe what needs to be done. That differs from firm to firm. We, as a firm, for example, whether it be control businesses or minority businesses, tend to operate very much with the philosophy that this guy is in charge, he is the entrepreneur, we have to be helpful where we know something or can access someone who can be helpful. But our job is not to tell him what to do.
As the market develops, you are seeing these shades. You will see more involved, activist-type investors who may on the margin be willing to play slightly aggressive roles as well and say, ‘No we want it to be done this way and this is how we do it’. And there would be others who take a more consultative approach. That will happen in the industry. Some of this is also being driven by many relationships over the years between private equity firms and companies that have not gone that well; particularly around exits and so on. So, in some sense, investors getting a bit anxious, pushing the envelope either because contractually there are rights they can enforce, and this and that can happen so do this, or there is some [contract] or something that we had agreed on. So, that’s also happening in the industry, which is creating some noise.
Q. How is the final decision on an investment taken? Is it something like a big day when everybody comes together and it is decided upon? How easy or difficult was the Alliance Tire case?
Mahadevia: Warburg is a company that has been investing in India for two decades. Institutionally, the firm understands India. So, for any opportunity that comes up, not just Alliance, we don’t start at, ‘The GDP is growing at 5 percent’. People understand it. They have seen entrepreneurs through the years and they have already got a calibration because you have seen all shades of entrepreneurs.
Malhan: Most global firms have the notion of what is called an investment committee. It is essentially a body of people that is almost permanent over a period of time; to whom every idea gets pitched and they decide to move forward or not. We have an element of that, but based on a few principles.
First, people who are closest to the investment—in the sense partners who are leading that investment—ought to have the bigger say because ultimately they are the closest to it. Which means they are also accountable. It works both ways. When things don’t work, you also have to take ownership. Second, if there is institutional knowledge in that subject that resides in the firm, let us make sure it is made to bear on that idea because otherwise we are not learning as an institution. Third, if there are senior people in the firm without direct knowledge of the subject, you should hear them out. You may choose to say, this is different, India is different, this industry is different, but we have a culture of talking about it and there are a fair degree of forums and networks where ideas get presented.
The core group that decides comprises the partners, the CEOs of the firm and, depending on the nature of the investment, the other relevant people who are part of that group. It is an informal committee on the fly.
Mahadevia: There is no cookie cutter approach. So, it is not bureaucratic, like these are the four levels you have to go through for approval. Alliance was complicated because it was different. Not the decision to invest behind Yogesh. Not whether he is a good entrepreneur, or not whether the vision makes sense. That was actually relatively easy, given that we knew Yogesh and spent time with him. But going out, finding a company in Israel, negotiating that, there were bumps along the way and Yogesh had to survive in Israel being a vegetarian. It took 9 to 12 months from start, when we met Yogesh, to actually complete the investment. It was just about getting the platform and making sure that worked. When we first did the Alliance transaction in 2006, he was not even 30 and we were—what?—32, 33. You step back and think about it and it is bizarre.