The Global Economic Impact of Private Equity Report 2008 - World ...

Executive Summary: Warburg Pincusand BhaRTi Tele-VenturesBetween 1999 and 2001, Warburg Pincus, one of theoldest and most respected private equity groups in theworld, made a series of investments totalling nearly$300 million in Bharti Tele-Ventures, a relatively smallIndian telecoms company. At the time, private equity wasvirtually unknown to most entrepreneurs in India; and BhartiTele-Ventures’ top management had never heard of WarburgPincus before their first meeting in 1999. Moreover, theindustry-specific risks could hardly have been more dauntingdue to the prolonged regulatory uncertainty in the telecomssector and the persistent inefficiencies that had resultedfrom fragmentation and a lack of competition. These factorsserved as major deterrents to investors, who were waitingfor visible signs that the government was willing to addressthese problems. This case describes why Warburg Pincuswas willing to reject conventional wisdom under suchcircumstances, and what the firm did during the postinvestmentphase, working effectively with Bharti’smanagement to enhance value, and hence its ownfinancial reward.The outsized risks were significantly mitigated by Warburg’sconfidence in Bharti’s management team, and their carefulcalculation that the inefficiencies inherent in the India’stelecoms sector were unsustainable. Change, theyconcluded, was highly likely to occur sooner or later, andtherefore the challenge was to identify a telecoms companythat was capable of capitalizing on the opportunity when thesector transformation began to occur. They found theirmatch in Bharti Tele-Ventures, a young, mid-sized localcompany founded and led by an extraordinary entrepreneur,Sunil Mittal. After Warburg Pincus’ initial investment, a closeand productive relationship ensued that successfullytransformed Bharti Tele-Ventures from a regional telecomsprovider to a company with a pan-Indian service capacityand ultimately the country’s predominant leader in the mobilesector. By the time Warburg Pincus fully exited in 2005, theiroriginal $290 million investment had generated proceeds forthe firm of $1.8 billion.This case describes a series of four investments totalling$18 million between 2000 and 2006 made by ICICI Venture,one of India’s largest and most successful domestic privateequity groups, in Subhiksha, a leading Indian retailer in thediscount food and groceries business. During ICICI’s sevenyearrelationship with the company, it has not only been asource of capital, but also a broad range of value-addedservices that have contributed to transforming Subhikshafrom a mid-sized regional retail chain into a pan-Indian marketleader with about 1,000 stores. Under the leadership of theIndian entrepreneur R. Subramanian and with the ongoingsupport of ICICI Venture, the company’s operating strategywas revamped to achieve rapid expansion across the country;its board was restructured and upgraded; more professionalmanagement information systems were designed andimplemented; and a number of high-level professionals wererecruited to strengthen the senior management team. Thecase illustrates that, as with all successful venture capital andmiddle market private equity investments, one key successfactor is the ability to first recognize genuine entrepreneurialtalent in a high-growth sector, and then forge a trustingrelationship that capitalizes on the strengths and expertiseof both investor and entrepreneur.Executive Summary: ICICI and SubhikshaThe retail market in India, as noted above, is poised tobecome one of the largest in the world, with a projected halfbillion middle-class consumers by 2025. However, much likethe Indian telecoms sector described in the Bharti case, theretail market is extremely fragmented and under-developed,dominated by more than 15 million tiny “mom-and-pop”shops called “Kiranas” that sell groceries and householdproducts at government-controlled “maximum retail price”;organized retail accounts for only 3% of the total market.Modernization of the sector is further impeded by protectivegovernment regulations that insulate the local market fromforeign investment. But, as the case demonstrates, it isprecisely these seemingly high hurdles that create enormousopportunities for talented Indian entrepreneurs and astuteprivate equity investors.142 Case studies: Indian private equity cases: introductionThe Global Economic Impact of Private Equity Report 2008