'India has some of the most promising entrepreneurs'

Since joining as Kohlberg Kravis Robert's (KKR) CEO and Country Head for India at the start of the year, Sanjay Nayar has been working on the private equity player's India strategy.

In an interview, the former Citibank executive tells Business Standard that the firm's model will focus on India and on helping Indian entrepreneurs build world-class entities. Excerpts:

Will the fund-raising scenario improve? Do you plan to raise resources to fund your investment in India?

Following the fiscal and monetary measures by governments around the world during 2009, we have seen a steady improvement in risk appetite for lending and investing. This re-emergence of risk appetite has exhibited a pattern, where we initially saw appetite for government-sponsored and backed issuances in the first quarter of 2009, followed by senior private issuances, and then the high-yield markets opened up.

Getting into 2010, as the business environment continues to improve, and depending on investor specific allocations, private equity should see fresh flows towards the latter half of 2010.

For India, we continue to believe that the market and clients here require flexible pools of capital that can address their financing requirements across the capital structure. KKR's $4 billion Asia Fund has thus far invested $1.6 billion, and we are actively looking for private equity opportunities across Asia, including India where we can be providers of strategic capital.

As a broad-based asset manager, we will continue to look for opportunities to tap additional pools of capital at the right time, for various products as we look to provide holistic capital solutions for our clients in India.

Have you identified any focus areas for 2010?

It (2010) will be an interesting year. With the promise of recovery along with stimulus-driven liquidity continuing to buoy consumption and capital markets, the supply-side and fiscal constraints will be areas that require quick and decisive action.

Capacity and private investment could potentially lag promise. As the stimulus is withdrawn, resulting in higher rates, private equity and strategic capital will become relevant for Indian entrepreneurs in the core and real sectors. Equity capital markets will be an attractive option too at current valuation levels.

While this demand-supply trade off plays out, we will continue to be long-term patient investors, and focus on efficiently-built distribution businesses, niche services, and infrastructure-related businesses, as they build on the country's inherent strengths and satisfy critical gaps.

From a product perspective, we also see a role for well structured mezzanine capital, which can help address growth capital requirements, keeping in mind the business risks associated with the stage of growth.

There were very few deals in 2009, should we expect a flurry of deals in 2010 or will firms like yours continue to be cautious especially when valuations have shot up in recent months?

Interestingly, KKR participated in two investments in 2009 - one was a follow-on, secondary private equity and debt investment in Aricent, which is a niche technology services company that we acquired in 2006, and the other was a structured financing to the Max India group.

While 2009 was a year India was coming out of a slowdown and the markets were rallying hard, we have tried to be proactive and remain very close to our clients discussing capital solutions. That's the core of what we do at KKR, and we will continue with that emphasis getting into 2010.

We believe that at these times, asset management firms with broad platforms, with flexible pools of capital, and those that are closest to their clients will continue to outperform.

Do you see a change in the trends in valuations and the deal size?

We don't see any reason for the basic valuation drivers or the methodology to change. As we get clearer signs of private investments kicking off and the supply-side constraints falling away, there might be more visibility on growth, leading to an upside in valuations. To the contrary continued slack in these areas might result in the markets correcting.

India is an economy with fragmented and small businesses across sectors, with a notable few exceptions, so growth in deal sizes will be a factor of how quickly we see consolidation and maybe some selective overseas acquisitions. Otherwise we might typically see deals in the $75-250 million range, with an emphasis on smaller deals.

Will there be a change in the way you manage your portfolio firms?

We will continue to engage with our portfolio firms for long-term value creation. KKR brings with it a wealth of experience in developing world-class processes and technology, and emphasising on the right management incentives to grow and build long-term value for all stakeholders. We have seen that play out in firms world over, including our existing portfolio firms in India.

At the industry level, do you see more companies exiting next year?

At KKR, our focus is on strategic investments that create long-term value for our portfolio companies and we will continue to build further on those partnerships. From an industry standpoint, firms will tend to be opportunistic if they see a window, but providers of private equity capital will also be focussed on timing their exits to their value-creation objectives at each portfolio firm.

Have you put in place the long-term blueprint for your India operations? What does it look like in terms of focus sectors and scale of investment?

KKR is focussed on building a long-term franchise in India - embedded locally and leveraging KKR's global presence and experience. We are working on developing a broad-based asset management and financial services platform that can play a relevant role in India's economic development.

India has some of the most promising entrepreneurs of this generation. KKR will work with these entrepreneurs to provide long-term strategic capital to help them build world-class businesses and achieve their local and global aspirations.