India's M&A market is now leading the way for top M&A emerging-market status. To capture opportunity in the market, Jina Ventures, headquartered in New York City, is on the move.
For the last seven years the firm has been growing and now operates two funds along with its M&A advisory practice. Ron Shah, a recent recipient of the M&A Advisor 40 Under 40 Awards, founded the firm.
Mr. Shah began his career in venture capital and private equity, working as an analyst for Resurgence Capital in New York. Sensing an emerging opportunity, Mr. Shah founded Jina Ventures in 2003 as one of the first American private equity firms to focus exclusively on India.
Under Shah's leadership, the Fund invested in 12 of India's companies and produced 11 exits in less than four years, with top quartile performance–47% IRR.
In addition to structuring and executing investments in India, the Fund added value to its portfolio companies through a series of international M&A transactions.
Jina Ventures is currently opening its second fund with the goal of $200 million.
Shah earned his B.A. in Business Administration from George Washington University and an M.B.A. in Corporate Finance from New York University's Stern School of Business.
We asked Shah about Jina Ventures and a host of questions on the India's M&A market, such as what middle-market dealmakers should consider when entering India, and how India's market differs from China's deal market.
M.A.: How did Jina Ventures come to be?
R.S.: I started my career at Quantum, a venture capital fund here in New York. I started looking at deals in China and India, and this is way before China and India really had a real private equity market. I started getting interested in Indian markets at that time and the Asian markets in general. I then moved to another fund, the hedge fund Resurgence Capital. Resurgence Capital was a little more focused on India and China than Quantum. While working for Resurgence, I had actually gone to India and China and looked at some of the first big private equity deals that occurred. We also looked at a number of family owned businesses in India.
I noticed and began to feel in 2003 that the Indian market would probably soon open up for private equity and that my then current firm was not focused on the Indian market enough. Eventually, I got a phone call from a friend in India who said, “Hey can you help me raise capital from the US?” I thought it was a find and I quit my job at Resurgence and started Jina Ventures.
We started purely as an advisory firm and we focused on the US-India corridor. We really felt like there was an opportunity in the space. In fact, one of our first clients was Makemytrip.com. Makemytrip, proudly, in the last two weeks just had their IPO on NASDAQ and was the best IPO opening in the last three years.
M.A.: Please tell us about your funds and your fundraising process.
R.S.: We helped about a dozen companies in our first two years of business both in India and in the US. And, we opened a small office in Mumbai. Eventually, we were introduced to a Japanese family. I was introduced by a professor of mine from Stern where I earned my M.B.A.. The family was very interested in investing in India. So, we took them to India and showed them a lot of transactions.
Eventually, they became very comfortable with us and decided to give us $50M to invest in India on their behalf. So, that started our first fund.
As the family is Japanese, their focus was on the industrial sector. So they and we did a fair amount of investments and ended up investing in 12 companies. Where our value in all of our companies was derived was in M&A. We felt that India's companies were going to do a great job of growing, but that they needed our support in order to expand overseas. That is how we build value through M&A transactions and through our presence in New York and Europe. Eventually, we exited 11 of these 12 investments and made 47% IRR.
For the second fund, we are in the process of raising funds and we have identified an anchor investor, again from Japan. What is important to note is that India's companies have had a legacy of having access to the US and European markets, but they have had a lack of access to Japan. The fact that we have been Japanese backed has been a great differentiator for us in the Indian market
M.A.: For both inbound and outbound activity, how do you see things moving in India?
R.S.: For Indian companies, given the common law legal system and the pervasiveness of English and the democratic system in India, I believe they have been a lot more confident acquiring even very large assets overseas. So, whether it is the Tata-Jaguar and Land Rover (or other deals), I think Indian companies have been ahead of the curve on large M&A outbound transactions.
The inbound side is, I think, the area of the future. I believe a big part of the problem that private equity funds have had in the past has been the lack of control positions in India. We believe that because of consolidations being so prevalent in the global market that you will see a lot more control positions in India. Buyout funds will start to emerge and we will start seeing a lot more inbound acquisitions by large companies who want to buy assets in India.
This is also a function of sophistication and maturity of the Indian market. If you look at large companies like Novartis, IBM or other really large companies, even if control stakes were available, they were a little hesitant (in the past) to acquire Indian companies because of the lack of institutionalization of companies, but that is rapidly changing.
We also think that for Indian companies and all the private equity that has gone into them, that the exit multiples and premiums are going to be earned overseas and not within India. In fact, if you look at IPOs in India in the last two years, they have been slightly underperforming–particularly in the small and midcap space.
M.A.:How do you compare India's M&A market to China's M&A market?
R.S.: When you compare Indian and China what you are really comparing is confidence in M&A. Compared to India, China has been more domestically focused as well. So, as you know, the big difference between India and China is manufacturing vs. services. India realizes that the country's firms and companies must acquire overseas, so that they can really get margins on service exports. China, oppositely, has really been focused on building capacity and really domestically focused. I think there has been a confidence issue on integration, cultural issues, and government control features, as well. Therefore, China has less of a free market than India–these are the prime reasons why China still lags behind in M&A.
M.A.: When looking at companies in India, what are your criteria and what are US investors concerns?
R.S.: The biggest concern people have about India and private equity, in particular, is valuations. People are concerned that private deals have become very expensive and competitive. And, there has been a lot of crowding on deals in India. From our perspective, we also have that concern. We do not want to enter into intense deal competition.
So, it is important that we find very proprietary transactions. As far as a company profile, what we are looking for is a company that has a high technology quotient. What I mean by that is we are no longer looking to acquire commodity businesses or commodity services. We are looking to acquire businesses that are ahead of the curve. For example, if it is a manufacturing company they should have a strong engineering component, which is how you get an additional margin, and is also how you create a barrier to competition. We want businesses that can absorb technology and can differentiate technology.
M.A.: On that note, if a middle-market dealmaker wants to invest in India and wants to capture value, what should they do?
R.S.: If you are looking to capture value in India, number one, do not invest in an area of high competition. Avoid any deal that is not completed at a valuation that does not leave much on the table. So, that's number one on the entry side. Number two, you have to invest in businesses that have an outlook beyond the borders of India. So, I think value is going to be captured in businesses that serve the international market. That is where the margin is. We also believe that is where the large strategic buyers will be acquiring. More specifically, when you drill down into these investments, you have to be clear that you are concerned about transparency–making sure an auditor is in place, making sure that the management team is well aligned with the investors' interest.
Transparency has been an issue in India and China and it remains to be a little bit of an issue. I think that investors also need to be aware of legacy issues in India. India is a new market when it comes to family businesses getting to a new level of institutionalization. So, some of the cultural issues need to be understood properly to really capture the value a dealmaker is looking for.
M.A.: Of all your transactions, thus far, which deal are you most proud of?
R.S.: Universal Power Transformers. The company is a power transformer in Bangalore and we are particularly proud of this deal. We invested early on. We were the first institution to invest in the business and the business is growing in both India and internationally. So, it was a great international play. The management team CEO was born and trained in North America. He brought a certain amount of sophistication, and he brought certain credibility by being the former CEO of a big family conglomerate in India. The dynamics of the business were strong and it was an end-to-end service in manufacturing. We were able to negotiate and structure a great win-win transaction. We supported the business. We assisted them with looking at M&A targets in Japan and the US and in Europe. We also supported them in operational improvements. The company grew approximately 150% in the first year of our investment on the top-line. And we helped them substantially grow their market presence overseas. In less than two years, we exited the business with a 90% return.
M.A.: Thanks, Ron for all your terrific insight
