Private Equity in India: The Most Exciting Emerging Market to Invest In?

Hope.

The foundation of venture capital.

And in some regions, private equity is more like venture capital: raise money from other people, put it into a bunch of companies that have no proven track record of financial results, and then… hope one of them takes over the world.

In other places, it’s less about finding the next Facebook / Instagram / WhatsApp, and more about financial engineering and using clever deal structures and debt to achieve high returns.

India is somewhere in between those two: private equity is quite new, and funds are relatively small… but achieving high returns is still more skill than luck.

At the same time, though, the industry is still “random” enough that you can break in by visiting PE firms’ offices in-person and then doing some networking on Facebook – as our interviewee today did.

Here’s his story, what to expect when you recruit for private equity in India, and what the industry there is like:

From Chartered Accountancy to Private Equity

Q: Let’s start by going through your background and the short version of what you accomplished. You know how this works.

A: Sure. I am a Chartered Accountant (“CA”), and moved from that background into a middle market private equity fund here in India.

(NOTE: My fund is “middle market” by AUM, but we really operate more like a boutique.)

About halfway through my CA studies, I became very interested in private equity because it gave me exposure to numerical analysis (Excel), strategic analysis (deal structuring), and operational work (understanding the company and industry).

I came from a family of engineers and so I knew almost nothing about business at first – I must have read every single article on your site (even the ones on fashion, which weren’t too relevant here since we don’t wear suits) multiple times to get up to speed on the industry.

After the CA, I started looking for a job and studying all the financial modeling and case study materials I could find, for about 8 hours per day.

Following the advice of your other interviewees, I used aggressive cold-calling and cold-emailing, but none of it worked since the finance industry was tiny in my city (even though it was one of the top 4 biggest urban centers in India).

And when I could find firms, the gatekeepers stopped me consistently.

So I took a different approach: I walked into local PE firms’ offices with my resume in-hand, and I asked to speak with professionals there – the industry is so small that I visited nearly all the private equity boutique firms in my city in a single day.

A VP at one of the funds agreed to meet me, but they weren’t hiring and they turned down the prospect of even an internship. I didn’t land any other interviews, so at the end of the day I was back to square one.

Q: Yeah, the “go to the office in-person” approach can work for some people, but it’s usually not your best shot.

What then?

A: I had almost given up, but then I decided to contact a guy who runs a daily business updates group with nearly 800 members on Facebook.

I had never met him before, but he was also a young CA and I thought he might agree to help me – I asked if he could refer me to anyone he knew in finance, and he put me in touch with his single professional contact in the industry: a friend at a middle market private equity firm here.

Two months, 8 rounds of interviews, and an 8-hour modeling and case study test later, and I won a full-time job offer there.

Q: Awesome. I think that’s the first example of “Facebook networking” we’ve featured.

Before we jump into the recruiting process in more detail, what does the private equity industry in India look like?

A: It’s very, very new, and most of the firms are boutiques with AUM of under $50 million USD. There are only around 10-15 funds with over $1 billion USD.

Many of the global mega-funds are interested in India, and some, like Blackstone and Sequoia, actually have dedicated Indian operations on the ground.

Deals are much smaller, overall – anything over $100 million USD is considered a “large deal,” and actual big deals (i.e. over $1 billion USD) are rare and only happen 1-2x per year.

The industries of focus have been banks and financial institutions, information technology, and real estate, although that is starting to change – more funds are investing in consumer sectors like healthcare and retail.

You could say, “The money is in the banks, but the value is in the consumer sectors.”

A lot of impact investing funds have been starting up as well – they tend to focus on the agriculture and micro-finance sectors, and they aren’t necessarily as concerned with earning high returns.

Deals almost always come in the form of structured equity, while a small number are plain vanilla equity; traditional leveraged buyouts (i.e. where debt is used for the majority of deal funding) are non-existent.

PE Recruiting in India… via Facebook?

Q: OK, great, thanks for that overview.

Even if you networked your way in via Facebook, I’m assuming that the rest of the recruiting process took place “offline”…

A: Yes, you could say that!

While headhunters are very active for private equity recruiting in North America, that’s not the case at all here: openings are hardly ever advertised, and even when they are, the initial screening is insanely selective.

So pretty much all hiring happens via referrals – you need to know someone at the fund who can vouch for you. Networking really is the only way to break in here.

Private equity interviews are almost exactly the same as what you see anywhere else, even though the average deal size and industry focus are different.

You really need to know your stuff with the technical questions in India – many funds here place additional weight on technical questions since they’d rather work with a smart, but somewhat socially awkward guy, as opposed to someone with great people skills who doesn’t know how to run a DCF.

Q: So I’m assuming that modeling tests and case studies are even more intense?

A: I would say: “Be prepared for in-depth tests and case studies, even though traditional LBOs are rare to non-existent here.”

Also note that even though traditional LBOs are uncommon, there are a huge number of regulatory restrictions on foreign investments in India – so deals can be complex, even if they don’t use leverage.

The modeling tests can range from simple 2-hour exercises (e.g., “Build a 3-statement model for this company and estimate the 5-year IRR”) to more detailed ones where you need flexible, granular, and justifiable assumptions for revenue and expenses.

The case studies can take the form of extended scenarios in interviews (e.g., “Let’s walk through how to project revenue, in detail, in a particular industry”) or industry research exercises.

In my case, they gave me an 8-hour test to:

• Build a detailed 3-statement model with unit-by-unit revenue assumptions and expense assumptions based on major cost categories. Justification of all assumptions was limited to a reasonability test; I didn’t have to research industry benchmarks. There was some emphasis on building flexible assumptions that others would be able to modify with ease.
• Write an investment memo to the fund manager – they gave me a choice of 5 industries, and I had to make the case for investment in one of those industries.

You’ve covered case studies, stock pitches, and modeling tests on this site before so I don’t have too much to add – the main point is that you need to be very quick with all of this work because you’ll be under extreme time pressure.

Q: Great, anything else to mention?

A: As always, you need to get your story straight.

I did “OK” on the case studies above, but they hired me mainly because the interviewer (the fund manager) was impressed with the passion I showed for the work itself and the efforts I had made to break in and learn about the industry on my own.

Q: Speaking of your story, how important is your previous background for getting into private equity in India?

A: Since investment banking is relatively underdeveloped in India, many blue-chip PE funds here actually hire based on your academic record instead.

It’s very, very different from the US and Europe, where investment banking feeds directly into private equity.

Sometimes, firms will even list a degree from the Indian Institute of Technology (IIT) along with an MBA from the Indian Institute of Management (IIM) or other tier-I b-schools like ISB as a “requirement,” which makes no sense since IIT is for engineering.

And if you have an MBA in finance from top IIM’s or other tier-I b-schools, some funds may overlook a complete lack of relevant experience altogether.

My story – an inexperienced CA getting into PE – is an extreme exception (and extremely good luck) and is pretty much unheard of. Normally, you would need that MBA in finance from the top schools to have a shot at this.

The mega-funds – the likes of Sequoia here – are extremely selective, and if you don’t have a degree from the top 5 b-schools in India or an Ivy League education, you don’t have much of a chance.

But boutique PE firms are more open to people with unusual backgrounds, so you’ll see professionals without those degrees at the smaller firms.

Of course, all PE firms here prefer people who have worked in IB before or who have prior modeling / deal experience, but in practice most PE professionals tend to have more varied backgrounds.

If you’re from a marginally relevant background, like consulting or equity/credit/industry research, it’s an uphill battle since you’ll need to prove that you can build a DCF model blindfolded, even to boutiques.

But at least boutiques will consider you, whereas bigger funds will not.

On the Job: Investing in India

Q: Thanks for that detailed description of the recruiting process – since the deal and industry focus seem so different, can you walk us through an average day in your life?

A: Sure. I get into the office between 8 and 9 AM, and then read up on the sectors we’re tracking and general news for about 30 minutes unless there’s something urgent.

For the rest of the day, it depends on what’s going on at the moment: there are usually 2-4 deals we’re evaluating at the same time, so I could be doing anything from initial due diligence to financial analysis, to writing memos or making models or presentations, to team meeting or investor calls, to industry research.

Overall, I spend more time on research than you would in other regions – since it’s required to understand industries and structure deals here.

Deals fall apart not just because of their investment merits (or lack thereof), but also because a cost-efficient structure might not be possible.

Very, very few deals ever proceed to the final stages, so I spend the majority of time analyzing/structuring potential deals to check their feasibility, and monitoring our existing portfolio companies.

If a deal happens to be in its final stages, then that takes up most of my time – but otherwise, most of my time is spent saying “yes” or “no” to potential deals based on an initial analysis or later stage due diligence, and seeing how our investments are doing.

Travel is rare unless a deal has advanced to its final stages and we need to go to the company for in-person due diligence meetings.

Q: Sounds quite busy.

A: Yes, the hours are bad by Indian standards, and even by usual private equity standards.

If I get in at around 8 – 9 AM, I might leave at 8 PM on a good day. But the norm is more like 9 – 10 PM, and 11 PM – 1 AM is quite common.

It’s generally a 6-day workweek, which definitely turns into a grind. I usually get Sunday off, so there is a bit of relief built in.

I’ve spoken to people at other funds here and hours seem to be similar everywhere – which is not a great deal when you think about the compensation as well.

Q: That was my next question. Let’s hear it.

A: You get paid peanuts compared to US standards – at the entry-level, it is the equivalent of $20,000 to $40,000 USD (assuming approximately 60 INR per USD).

That may sound horrible, but keep in mind that the cost of living in India is also much lower and the median household income is about 30-40x lower than in the US and Europe.

So it’s actually a sweet deal for your first or second job here.

Pay also varies a lot based on your background and the size of the fund (bigger fund = higher average pay).

One other interesting point is that compensation climbs sharply once you have full-time experience – so even though it starts out at low levels, you’ll also see quicker gains than you would in developed markets.

The “ceiling” at the Partner level is still substantially lower than in the US or Europe, but on a PPP basis it’s higher.

The hierarchy itself is very similar to what you see anywhere else, but as I mentioned, advancement, pay increases, and skipping levels can happen more quickly and more often here.

Q: OK, so let’s say you get tired of the grind – what are your exit opportunities?

A: If you leave PE here, you leave to get your MBA or to move to a bigger fund. There’s literally no other reason to leave, assuming you want to stay in the country – there just aren’t many other higher-paying or more attractive opportunities.

So unless you absolutely hate the work, you’ll rarely leave (but how could you have gotten in if you hated the work?).

“Hopping around” to different funds is very common; sometimes funds that want to hire aggressively will let you skip one rung of the ladder in the PE hierarchy.

As an example, I spoke with a guy who moved from 1 year in corporate banking, to an Analyst at one of the largest funds in the world, to a Vice President at a much smaller, impact investing fund after only 2 years (!) because the smaller fund really wanted him.

Then, after ~3 years there, he jumped to a bigger impact fund and became “Regional Director – South Asia” in the process… all before the age of 30.

The industry is so unstructured that funds are willing to make exceptions and go to great lengths to hire you if they really want you.

So that’s one advantage of working here, despite the lower pay and long(er) hours.

In developed markets, you have to bend over backward to get into the mega-funds – but in India, if you already have PE experience the power is in your hands.

Q: So are you going to follow that plan as well?

A: Hah, well, I’m definitely staying in private equity, though I might go back to business school first.

I enjoy what I do too much to consider anything else, despite the long hours, and, as I mentioned before, there aren’t a ton of other attractive options here once you’ve already worked in private equity – so there’s little incentive to quit.

Q: Great – any final thoughts?

A: I was really surprised when you mentioned that you get over 20,000 visitors per month from India, so I wanted to share as much as I could.

I had started a blog of my own (Bateman Begins) last year, which I have since discontinued due to lack of time (yeah, I can hear you chuckling).

But the whole purpose of the site was to explain finance in India – you wouldn’t believe how many people here think “BB back office operations = investment banking.”

Q: Awesome, I like the name. Anyone interested in finance in India should check it out as well!

Thanks for your time!

A: My pleasure.