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"Invest in leaders, even at premium"

Blackstone's back-to-basics approach in the downturn has helped its portfolio companies come off lows with 3-to-5 times rebound.

Akhil Gupta | Print Edition: January 10, 2010

We in the Blackstone India team were in the middle of due-diligence on four deals when the financial tsunami struck on that fateful September Sunday (September 14, 2008). We were so immersed in trying to close these deals that we actually learnt about the fall of the hallowed us investment bank (Lehman Brothers), a full 24 hours after the event. And there were immediately two thoughts in my mind—one said that the impossible happens and the other said that it was not surprising considering the levels of excessive leverage.

As if this economic pain was not enough, we found ourselves victim to 26/11, one of the worst terrorist attacks ever on Indian soil. And to compound it further I read a report on the potential devastating impact on the Indian economy, caused by the melting of Himalayan Glaciers, due to global warming. In fact, looking back, the root cause behind the three biggest crises that we face today—the financial crisis, terrorism, and global warming—clearly is human selfishness, combined with greed and fear, which when manifested in a herd could even put the future of mankind at peril.

Stay disciplined on price. Don't let rosy projections distract you.
Leaders outpace laggards faster in a downturn. Take advantage.
Crises teach you to focus on fundamentals; don't let anything else sway you.
Stick to convictions, even if in a minority. Keep your head, even if others can't.
Never get carried away with the bubble.

With hindsight, it is also clear that we encountered the fault lines of both capitalism and democracy, lessons from which are many but one important takeaway is that we can't rely on the altruism of capitalist players to check their own greed. We must, however, ensure that a new regulatory system doesn't curb any initiative, enterprise or innovation—it should only check excesses.

What are the lessons at the micro-level that we learnt from the crisis?

First: Crises are a great opportunity to learn. They teach you to remain focussed on fundamentals. Your future view should not be coloured by euphoria or the gloom/doom of the present as the case may be. Remembering this will make you a better investor.

When the crisis surfaced, Blackstone became more proactive and controlled in its approach to investing in India. Investments were chosen very carefully. We avoided ‘trendy' deals, but instead focussed on key themes that will drive Indian economy even in a downturn—personal consumption and infrastructure.

Second: The gap between leaders and laggards widens during a crisis. Investing in leaders, even at a premium, is always a safe and prudent strategy and protects you in times of crisis. This is borne out by the out-performance of our India portfolio during the crisis relative to its peers, because of the quality of leadership at those companies and the leading position they occupy in their industry.

For instance, strong and proactive leadership of Susir Kumar and his team at Intelenet Global Services, supported by Blackstone globally, has helped the company weather the financial storm and outperform its peers. So also, garments market leader, Gokaldas Exports, which, with some belt-tightening and drawing on Blackstone's global resources, expedited implementation of lean manufacturing practices, to emerge leaner, stronger and more productive.

Third: Always stay price-disciplined. Don't let leverage levels, current market multiples, robust projections or competitors' activities entice you to abandon price discipline. For instance, at Blackstone India, we evaluated more than 100 investment proposals over a period of six months, before investing in Gateway RailFreight.

Fourth: It doesn't justify losing your head, because everybody else is losing theirs. Stand up to your conviction even if you are in a minority. We invested in textile exports when the consensus was against us, because we strongly believed the macro environment had become highly favourable for Gokaldas. The elimination of the garment quota regime meant $50 billion of exports from high-cost countries would shift to low-cost locations including India, China, Vietnam and Bangladesh. We believed that strong investment in urban and non-urban infrastructure will be required to drive long-term economic growth for India and hence we invested in Nagarjuna Constructions.

In the recession, we at Blackstone felt the heat too, and our private equity, hedge fund and real estate investing business came under pressure unprecedented since the group's birth in 1985. The crisis presented a great opportunity to build the competitive position of our India investee firms through synergies with our global portfolio companies. Intelenet, for instance, acquired Travelport iso, the India-based captive operations of our global portfolio company Travelport Group and Upstream, to enable Intelenet deliver end-to-end services in the travel business and expand its near-shore delivery capability. We learnt never to get carried away with the bubble, because in the long term if fundamentals are strong, and one is disciplined in one's approach—success is assured.

Akhil Gupta 56, is the Chairman and Managing Director, Blackstone Advisors India

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