Private Equity is all about growth now, not cost-cutting: Stephen Pagliuca

Stephen Pagliuca, co-chairman of Bain Capital, feels its India private equity business has reached an inflection point, such as the $1-billion-plus investment in Axis Bank. During his recent trip to mark the fund’s tenth anniversary in India, Pagliuca spoke to ET’s Arijit Barman about his outlook for India and the world. His mantra — align with the best management teams. That helped the fund navigate the business flux that hit L&T Finance just after its investment or Axis Bank being forced to look for a new chief executive. The first foreigner on the board of a domestic bank, the co-owner of NBA franchise Boston Celtics believes Axis Bank has a great retail franchise and so incoming CEO Amitabh Chaudhry should build on that core strength. Edited excerpts:

It’s been a decade since the financial crisis. What’s the journey been like?

I think the US reacted very rapidly during the financial crisis. As a result, the banking system has much more cushion than it had in 2008. You also don’t have the level of lending that you had in real estate or speculative businesses. For our businesses, we have to be disciplined. There’s a misnomer about the private equity industry based on the 30-year-old trend that we get into companies to fix them by cutting costs and make money. Today, most companies are pretty well run and so you have to go with a thesis on how you can fundamentally grow and transform these companies into a better-growing company. PE is all about growth now, by adding value. Since the crisis, we’ve had great expansion in the US. This is the best time for profit and expansion for corporate America. But the question is, how long will this last?

But what about Europe or even Asia? The China-US trade wars are grabbing the headlines.

Europe was a little slower to react to the banking crisis, because of which they saw some write-offs, but it’s getting better now. It’s very tough to have a union where you don’t have a centralised monetary policy, but the worst is over for sure. In Asia, fundamentally, global trade has lifted billions of people out of poverty. In fact, many of these economies like China have developed now. India is also catching up the pace. We are also seeing a backlash as the industrialised countries in Europe and US are reacting since they have seen stagnant wages or even job losses. So the world’s going through a transition right now and that adds to risk perceptions. I’m hoping for a legitimate discussion around fair trade with countries having equal barriers. Just like Asian economies, even the US has to safeguard its workers. I’m hoping a lot of the more hyperbolic rhetoric is just rhetoric and that cooler minds will prevail.

But does it alter or tweak the investment strategy for Bain, especially on the trade front?

It hasn’t so far, but the question is, if or when will there be a tipping point? If we get into a full-blown trade war, we certainly have to take that in to account and anticipate that may happen. Since we’ve been in China, it’s crossed the threshold from being an export manufacturing economy to being a service economy. Services has just crossed about 50% of the GDP there, so it is turning into a mix more similar to the western countries. When we look at investments now, we do have to factor in the short-term, medium-term and even long-term effects of what would happen if there’s a sustained and high-level trade war. So, we’ll be more conservative if in the worst-case scenario the trade war does happen. In that situation, everyone will lose, and it will certainly hurt the ability for capital to flow freely into different markets.

Does it impact the fourth fund that you’re trying to raise now?

It has not. Asia is seen as a very strong area to invest in private equity and Bain Capital is seen as a very strong player in the Asian markets because we bring something very different to the equation, which is really helpful in these markets. Companies here want us to help in terms of strategies around growth, product innovation and digital marketing. As you know, the whole origin of Bain Capital was really to take our consulting and analytics skills and use that in investing and to help our investee companies. So we never came from a purely financial orientation.

When you raise a fund for Asia, how important is the Indian component?

Our investors have really liked our pan-Asia approach and it has worked very well for us. India is an important market for us. Like other markets, in India too, we have started slow and then accelerated. In India, we have already deployed $3.3 billion in 10 years. There’s no hard allocation for any country but on an average, India deployment has been about 20-25% of our Asia funds.

But how to expect that number will only go up now?

It is really more of a bottoms-up thing that aggregates to a number. It would depend on the opportunities. All I would say is that we don’t hesitate to write a billion dollar plus cheques, example… Axis Bank.

But right now India’s currency risk has just gone up quite sharply?

We always knew that there’s a currency risk in India and we try to price our deals with that risk factored in. We also try to do hedging as much as we can. We have been hedging in Japan, India and in Brazil as much as we can. But yes, it is definitely a factor.

And what about the political risk in India? Comparing India to Italy or Brazil, you are looking great. Even in the UK you have had Brexit. I come from the US so I should not talk about political risk. I would say that directionally, political risk has lessened in India in the last 10 years. We are more focused on micro than the macro conditions. The beauty of private equity is that we can have a long holding period of say 10 to 12 years with fund extensions, so we are able to take a long-term view.

Globally, Bain Capital is known as a fund that believes in operational turnarounds. In India, however, you have been partnering with reputed companies taking smaller positions. Why move away from a tried and tested strategy?

In the US, we actually have many cases where we were not in control because we take companies public and then we own large minority positions, and not control positions. The key for us is alignment with the management team and with the board. We are on the board of these companies just as we are on the board of Axis Bank or L&T Finance. We have to believe in the business model of growth. So far that has worked out very well in the US and across the globe. So we use the same techniques but we have to make sure we are aligned with a great partner and that we bring great value. During my consulting days, we worked with the CEO towards a common goal but we had no equity control. We weren’t just writing reports but the whole mantra was to help the CEO pull the stock prices up. So even in PE, we are sticking to the basics. Plus, in a market like India, these are the type of deals that are mostly offered to funds.

There are entrenched promoters and management teams in India. Do they listen or are you just another capital pool?

We haven’t had that experience. I know Pawan Munjal personally and he welcomed us into the company (Hero Motors), would ask us for help strategically and he was a person who really wanted to grow and build a company. We have been welcomed universally from Hero Motors to L&T Finance. It’s early days in Axis but the feeling is no different. The companies do take our strategic inputs and work on them.

You are the first foreigner on the board of an Indian bank. What’s your input/advice for the new CEO?

Amitabh (Chaudhry) is one of the most impressive CEOs I have ever interviewed. Without getting into specifics, I always tell the CEOs to focus on their core strengths. That way CEOs can do a lot better for their shareholders. We are a big believer in scale and market share, because higher the share, the more you can invest in research, digital, operations, drive customer value etc. The idea is to find the three things that move the needle most and drive those.

What’s your view on the Axis Bank situation and what happened with Shikha Sharma?

If I step back, Shikha has done a great job in navigating the bank and in building a great retail franchise. We invest in companies that we think have potential and have a good market position, which Axis Bank surely does. We’ve been through many, many CEO transitions in our portfolio companies. This transition happened earlier than we expected for sure but she has put the bank in such a good position which allowed us to go out and interview some of the strongest candidates that I’ve seen in a CEO search. Industry acknowledges that this is not a turnaround but fixing up couple of missteps.