POORNIMA VARDHAN AND TAPONEEL MUKHERJEE
The development and expansion of Indian enterprises, especially in terms of improving capital use efficiency, can benefit from understanding global trends in money management and business efficiency.
The one trend that has been in focus throughout the asset management industry, especially the private equity world, is “permanent capital”. This is broadly defined as access to funds for long periods instead of the usual seven to ten-year fund horizon that has been the norm in the private equity industry. Permanent capital funds focus less on exiting investments in a defined period – and the emphasis is more on generating potential long-run investment returns.
Investors have generated permanent capital through a variety of strategies. Some large investors, such as Blackstone, Apollo & KKR, have utilised Initial Public Offerings (IPOs) to generate capital they can invest strategically. Apollo has also generated permanent capital through investing, and managing assets for a retirement solution focused annuity business called “Athene”, which, through its annuity business, generates significant cash that Apollo has utilised to generate returns.
Permanent Capital Vehicles’ (PCVs) growing popularity, in large part, was inspired by Warren Buffett. As the head of one PE firm was quoted by Financial Times, “everyone is suffering from Warren Buffett envy”. Specifically, Berkshire Hathaway’s buy-and-hold investment strategy, wherein every investment is viewed as an acquisition in a company rather than a mere trade. As such, the investment is considered a vote of confidence in the company’s prospects and a long-term commitment to helping it achieve the same. As Buffett himself once famously noted, his “favourite holding period is forever”.
While Berkshire Hathaway may be the most celebrated name in the PCV space, it is by no means the only one. Markel Corporation, Danaher, Apollo, ThermoFisher, KKR and Johnson & Johnson are other examples – and the list is growing.
So how will Permanent Capital help India in the next decade?
The success of nations/economies depends on access to high-quality growth and low-cost capital. While India will enjoy high growth due to favourable demographic and economic factors, access to the low cost of capital will be critical. As the world heads toward high inflation and high-interest rates, the ability to make India an attractive destination for global capital is a must. The Indian government has been making a huge push in this direction. Government-led economic planning platforms, such as the development of GIFT City and the International Financial Service Centre (IFSC) in Gujarat, have already been created. There is a significant push to create a more open and conducive regulatory scheme and simpler tax structure. With Permanent Capital, India will have the advantage of accessing global investments while generating long-term returns for investors.
– Permanent capital allows prioritising value and steady long-term returns over risky one-time buyouts that may be adversely impacted by unpredictable market cycles. Long-term value creation will help generate significant returns.
– With higher degree of permanent capital, it will allow Indian businesses and investors to access opportunities for longer periods, ride out periods of high market volatility and, most importantly, acquire assets at attractive valuations when rivals cannot do so due to unfavourable market conditions or internal distress.
– With permanent capital, Indian companies can pursue essential high-growth-high-return projects that may yield significant investment returns in the future.
– For investors looking toward emerging markets such as India, PCVs are essential, especially in the context of relatively lesser secondary market liquidity, longer investment horizons for value generation and smaller size of debt capital markets. Using PCVs to hold on to investments longer for value creation could be a vital factor.
– Most importantly, stable cash flows via permanent capital can help shield India from adverse market conditions and businesses from the adverse funding conditions and assist a company in acquiring valuable assets across the industry. Over the past decade, long-term investing has garnered more takers, especially in the aftermath of the Great Recession, following which economic growth, especially in developed countries, was muted. The usual buy-and-sell-quickly strategy was becoming less viable. Case in point: a quarter of buyout firms worldwide never raised a fund post-2008.
As the capital markets and businesses in India evolve, winners and losers in highly competitive markets will be determined by various factors, including sources of funds. Both the quality and quantity of funding available will be one of the fundamental factors determining long-term winners. Permanency of capital offers some essential insights into improving one’s competitiveness.
(The views expressed in this article are personal and that of the authors. The authors, Poornima Vardhan and Taponeel Mukherjee, head AltG, a firm that Offers Proprietary Investment Research)