Q: How concerned are you about global factors, how much of a concern is Europe?

A : My concern is that things seem to have rebounded back very quickly at least in terms of the numbers we saw last week. The PMI numbers, the numbers you saw from Germany in terms of exports all time highs, which is good in a way. I think there nothing wrong with that.

I think the stress test is something that was a big sense of relief although there are a lot of questions being raised, was it too easy or not but just having a union of countries with pretty distinct fiscal objectives and different politics, to assume that you will have pretty smooth path from here looks a little difficult to believe.

More from our point of view when we look at the world from a private equity point of view, big companies and small companies, it is not easy for them yet to get capital from banks, to get the day-to-day functioning. So unlike the US, I don’t think the European banks are out there lending and getting the working capital again.

So my worry is that this phenomenon you are seeing in the last 10-12 days of euro coming back, the sterling coming back against the dollar and good numbers, I hope it sustains but I doubt.

Q: Let us talk about private equity. What in your own opinion caused the drop in PE investments in India? I believe it was about USD 17 billion in 2003, we dropped to about USD 3 billion in 2007 before we stated picking up again. What caused that drop? Was the 2003 number too optimistic and then we just came back to normal or what was it?

A : When I look back, the 2003 number was extremely optimistic because I think private equity was and even now to an extent treated as an alternative to capital and capital was sort of flowing in. There were so many opportunities.

Q: It was primary looking for growth?

A: Absolutely. So money was just coming in getting into pipe deals and unlisted deals. There was a lot of euphoria in terms of deals getting done. Obviously it came off because markets had gone to all time highs and people found it expensive to invest. Whatever form of capital it was it did touch astronomical numbers in '03 and '04.

Q: Did they pick up the markets? You joined in early 2009 when the markets had begun rebounding. So valuation must have looked attractive. Did the pick up kind of upset calculations of private equity players?

A: I do not know. The way we approach private equity we do not do much of pipe deals. But there is no doubt. The expectations do go up for the promoters and entrepreneurs as the public markets pick up.

I also think when the markets go up, the level of dialogue also goes up unfortunately in a way because promoters and entrepreneurs see a much clearer path for growth. They are much more confident to put money to work and grow capacity and to diversify. So the dialogue level actually has gone up quite a bit I would say from ’09 and well into this second quarter.

Q: You also spoke in the earlier part of the interview about the amount of money sloshing around. Are promoters even looking at private equity as a source of investment?

A : They are. I think private equity has come a long way in India. You had the initial wave of private equity which was some engineering stocks. I think the most recent 3-4 years has been a lot more value added capital coming in.

So promoters when they look at private equity now they view it from two sides. I would say a majority of them, and rightly so, they look at private equity as another form of capital. So it has got to be competitive in terms of pricing.

But there is a whole set of entrepreneurs and companies who really want to become world class leaders in terms of businesses, the business practices, in terms of the technology. I think private equity can add a lot of value.

Those people are talking to us, and I am sure do other firms. I would say in the industry the level of dialogue today is actually quite active. So while there is a lot of money sloshing around this quality of money is getting recognized.

Q: So would you call it intelligent money or the money that comes with intelligence?

A: I would not say it is intelligent money. But I would say clearly it is capital that has come with a lot more promise to add value and in a way be co-industrialist with Indian entrepreneurs to help them build world class companies. I am not sure it is intelligent or not, but it is definitely much more value added.

Q: Why did KKR take so long to come to India? You were one of the large big firms to come to India. Is it because they were looking at someone like you or is it because KKR is seen as a company that likes control in Indian market, promoters were not willing to give up control of the companies and that is why you really did not want to come until the market was in a sense ready for you?

A: I will never know the answer to why they came into 2009. But just to correct you on that, KKR made the first investment way back in 2006 in India through Aricent. So that was way back in '06. Infratel was some time in '07. So investments were made. So it is not that late.

But having said that I think the belief clearly is that when you come into a market like India or China and some of the Asian markets or for that matter anywhere, the philosophy is to have your office have the right people and to really plant a flag as an establishment for good here. Those things take time. But in terms of investments and spotting opportunities they were always looking at things.

Q: Let's talk about your investments here. You have got Aricent, you've got Bharti, you've got Café Coffee Day, you've got Dalmia Cements – so you have got a pure technology play, technology infrastructure, you have got a pure consumer play and a commodity. So what do you use as a strategy when you invest in these companies?

A : Firstly, I think in India you will appreciate, every sector is growing. There are very few sectors you can say we will not look at because the J-curve is there in every sector, the promise is huge. So I don’t think that is an issue.

The most important thing for us is to find the right quality of people to partner with. That is of absolute and critical importance, people with whom we can share the vision and really buy into the business plan both ways. What the promoter is going to deliver, what the company is going to grow into and what if any value can we bring to the table. If we cannot bring any value to the table, I doubt we will make that investment.

So if those three conditions are done then I think it comes down to things like returns and to see how real is the business plan. So if you look at these four, or at least look at the last 2 or 3, I suppose it is no magic that you have a consumption play which we all agree. India is place where consumer is going to be a significant part of the economy. Just what we discussed demographic, urbanization and that is happening.

If you look at cement, it is a way to play the infrastructure story, it is a way to play the middle income housing story and that is again no great rocket science. So we try to do a lot of bottoms-up work, but we also look at macro themes. In private equity we just don’t play behind a macro. So when you have the intersection of a good macro theme and you can find the right companies to partner with and the right promoters, and entrepreneurs then that is a great choice. So, some of these three or four have gone that way.

Q: Flextronics was a buy made in 2006, it was in a sense almost the takeover of the company. Bharti Airtel was of course a well established promoter. But the last two you made has one thing common to both: young promoters, whether it is Siddhartha (Hegde) of Café Coffee Day or Puneet (Dalmia) of Dalmia Cement. Did you even subconsciously feel that you will be able to work easily with a young promoter because they will perhaps be willing to listen to you more in the board room even if they don’t give you control?

A: I never thought of it this way. This is another way of thinking about it. I didn’t think of it that way. They are young entrepreneurs. But when you sit on the buy side and you look at some of the stories in India and some of the young entrepreneurs, it is amazing, the quality of entrepreneurship and the quality of people that you come across. These are just two examples of what I would say world class entrepreneurs who are forward thinking.

We talked earlier, how difficult it is to do business in India, try putting up these 1000 stores and putting up plants is difficult. These people have done a great job. And if we can come in with capital and a catalyst to help realize their dreams and help them grow bigger and run better companies, I am sure we will together create terrific value. But I did not think of it from an age point of view, I think I should do that.

Q: I said age because perhaps they are more receptive to ideas, and at the end of the day as a private equity player you won’t be able to help with strategy?

A: I think it is true for lot of Indian entrepreneurs. Indians are known for their entrepreneurial spirit and some of these people are just absolutely world class.

Q: You opened an NBFC in India. Is that something you normally do in other countries or is India again a different kind of market?

A: The NBFC has just started. The whole idea was to basically be a solutions provider along the capital structure to our investee companies and to the Indian companies here, which means when we go and talk to an Indian companies, we aren’t just peddling a product, but really try and see what the right capital structure is for that company.

I think what NBFC does in a very broad base, it has just started, is that it gives you the ability of providing some debt or some degree of a fixed income into the capital structure. So I think we want to try and position this as more of a capital solutions approach which as you'd appreciate in India, in terms of the flexibility you need here to deal with companies this gives us that extra tool that we need.

Q: What is your view on PE money coming into emerging markets? How is that pipeline looking and how is it specifically looking for India?

A: In terms of PE there is a lot of money waiting to come into these markets whether it is portfolio or FDI/PE. My sense is it will pick up as India grows and grows with the absorptive capacity. The other thing one has to watch for is there is truly some consolidation that happens here because as we were discussing earlier there is just so much of fragmentation in any industry you pick up.

So if there is a consolidation that begins to happen and people actually begin to sell and on other side you have buyers, I think PE will find even more opportunities and you will also find larger conglomerates maybe deconsolidating over time.

These are all things that we have talked in theory for many years and it doesn’t really happen and one of the reasons I think is just cost of capital in this country has been rather low. A lot of people will hate me for saying that. The fact is you have negative real rates today.

So going back to your question, I think if the cost of capital is what it is and there is not too much of consolidation, then you won’t find too much private equity. But if consolidation picks up, the growth story is intact; I think there will be lots of private equity capital available.