L. Brooks Entwistle is a managing director of the Investment Banking Division of Goldman Sachs. From 1998 to 2004, he was based in Asia, where he had responsibility for India. The views expressed here are his own and not necessarily those of Goldman Sachs. Capital Comes Calling on India L. Brooks Entwistle One of the toughest tickets to come by to- ond, investors have developed an “invest- day is a seat, any seat, on a flight from the ment thesis” with respect to India based on world’s financial centers to India. If you are five key factors, including an abundance of lucky enough to get a seat, you will find skilled labor and a significant time-zone ad- yourself surrounded by private equity pro- vantage. Third, the success of several sectors fessionals, venture capitalists, and invest- of the Indian economy in the global market- ment bankers. You cannot miss the type: place has given financial sponsors case stud- just look around at the people working ies to show to their investment committees. throughout the flight devouring analysts’ Infosys and Wipro in the information tech- reports, business plans, and other back- nology (IT) services sector and Dr. Reddy’s ground research as they begin their quest for Laboratories and Ranbaxy Pharmaceuticals the next big investment opportunity on the in the healthcare sector are excellent exam- subcontinent. Some of the world’s leading ples of Indian companies achieving world- private equity firms, venture capital players, class status. Fourth, India’s own public equi- and hedge funds (collectively referred to as ty markets have matured and performed “financial sponsors” in this essay) already are well in the last year, attracting significant firmly established in India, including War- foreign institutional investor (FII) interest in burg Pincus, the Carlyle Group, General the country. Net inflows of FII funds to In- Atlantic Partners, and Newbridge Capital. dia have increased dramatically from $6.7 The race has begun, with a second wave of billion in 2003 to $8.5 billion in 2004 to international private capital players now $4 billion already in early 2005. The exis- looking to plant the flag on the subconti- tence of a deep public equity market pro- nent. In the spring of 2005 alone, over 25 vides financial sponsors with both increased new India-focused private equity, venture investment opportunities and a means capital, or hedge funds were raising new in- through which to “exit” or realize profits on vestment capital. Add to that the firepower these investments. Fifth, the emergence of a of financial sponsors who are looking to in- robust mergers and acquisitions market has vest in the country through an already exist- given financial sponsors another mechanism ing fund and you have a huge wave of capi- through which to exit their investments. tal heading toward India. General Atlantic Partner’s sale of Daksh, a This heightened interest among finan- business process outsourcing company, to cial sponsors in India has been driven by IBM is a good example of this phenomenon. several factors. First, the overall economic Finally, the first wave of private equity play- picture for India is one of explosive and sus- ers have realized significant success in the tained growth. According to some predic- last several years. Warburg Pincus, the tions, India’s economy will be the third largest foreign investor in India, has been largest in the world by 2035. This economic able to return a significant amount of the engine will drive demand for capital. Sec- over $1 billion in equity it has invested Capital Comes Calling on India 45 while still holding several substantial stakes pass Japan and the combined economies of in leading Indian companies, including Britain, France, Germany, and Italy. India is Bharti Telecom. also projected to sustain its spectacular an- At the same time, several important fac- nual rate of growth of 5 percent or better tors could divert the wave of capital heading through 2050. No other country, China in- toward India. First, India has failed to in- cluded, will show this sustained growth rate vest in infrastructure to keep pace with the over the same period. With its overall popu- growth of the economy. For example, only lation expected to surpass China’s in 2035, five years ago the drive from one’s hotel in India’s workforce will continue to expand Bangalore to Electronics City, the home of into the middle part of the century, long af- India’s IT services miracle, took 30 minutes. ter China’s workforce begins to age and thus Now that same drive is a pollution-choked decline.1 experience that takes an hour and a half What does this all mean for potential through heavy traffic. Second, capital needs investors? Consider the following examples ideas. While no one would suggest that In- from the oil, automotive, and mobile phone dia is lacking in entrepreneurial spirit, the industries. India’s contribution to the rise in country must work toward promoting in- global demand for crude oil is likely to sur- vestment across all sectors. Financial sponsor pass that of China in 15 years. India will activity has been concentrated in the infor- represent potentially 15 percent of overall mation technology, telecommunications, global demand for crude by the year 2050. and healthcare sectors. The automobile com- The geopolitical implications of India’s in- ponents and chemical sectors show signs of creasing demand for crude are evident in its coming to life, but others need to follow. recent negotiations with Russia, Iran, and The retail sector, for instance, is still heavily Myanmar. regulated, restricting foreign investment. Related to this steep growth in oil con- Lastly, China looms. Potential financial sumption is the dramatic rise in the number sponsors are also looking at China, and just of automobiles in India. Over the next ten as China and India will compete for natural years, the number of cars in the country will resources in the years to come, they will likely triple. By 2050, India is projected to also square off against each other to attract have the second largest car market in the capital. world after China. As India’s manufacturing prowess grows, the proliferation of indus- The Macro Economic Machine tries related to the automotive sector, in- The change in India since the market liber- cluding an already burgeoning auto parts alizations of 1991 has been extraordinary. market, will provide ripe opportunities for The abolition of the government-controlled financial sponsors looking for businesses in “Raj” industrial licensing scheme, the re- which to invest.2 duction of import tariffs, and the initial Many experts believe that the “sweet opening of the country to foreign direct in- spot” for mobile phone penetration is vestment set the stage for India’s emergence GDP per capita of roughly $3,000 per year. from its economic shell. As positive as these India, whose mobile phone market has al- changes were, however, it is future possibili- ready taken off, will not hit that level of ties that have potential investors in the GDP per capita for another 15 years. Even so, country breathless with anticipation. the telecom sector has proven to be fertile As noted, India’s economy is projected ground for investment.3 by some sources to be the third largest in Beyond this rosy macroeconomic pic- the world by 2035, trailing only China and ture, it is important to point out the critical the United States. Along the way, India will tenets of the investment thesis for financial 46 WORLD POLICY JOURNAL • SUMMER 2005 sponsors looking at India. First, India has an they tour the sprawling Infosys headquarters abundance of skilled resources. The coun- in Bangalore. From just one building less try’s large pool of engineers and postgradu- than a decade ago, the campus now com- ates, all of whom speak English, have a prises 20 buildings and features a swim- proven track record of providing high-end ming pool and health club for employees, solutions to problems and world-class re- restaurants serving both local Indian cuisine search and development. Second, the cost and Dominoes pizza, and a coffee shop with benefits of doing business in India, while the best latte on the subcontinent. This im- eroding in IT engineering and other sectors, pressive complex, with its enormous train- are still significant. Importantly, this cost- ing facilities and futuristic board room, is benefit structure has coexisted with recog- an epiphany for people who once questioned nized high-quality work. Third, India has India’s potential. established a reputation for quality delivery. Infosys is by no means alone. Wipro Over the years, the importance of refined and other IT services firms have created process methodology, stringent quality con- similar world-class facilities around the trols, and the general adoption of global country. Healthcare companies have fol- “best practices” have enabled Indian compa- lowed suit, with Dr. Reddy’s and Ranbaxy nies to deliver competitive services and achieving a level of international recogni- products globally. Fourth, the country’s tion. The success of these companies has time-zone advantage, which makes it possi- spawned a plethora of smaller start-up com- ble for Indian companies to program soft- panies that are striving to follow in the foot- ware, staff call centers, produce documents, steps of these early pioneers. The opportu- and provide myriad other services while the nity to invest in the next Wipro, Dr. Red- United States sleeps, has continued to be a dy’s, or their equivalent in other emerging critical dimension of the value-added thesis industries is driving the financial sponsor for India.