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The great Indian tiger hunt

George Malim is a freelance journalist based in London.

India's burgeoning middle-class, skilled workforce and low cost structure make it a potentially attractive investment arena for HNWIs and family offices. But local expertise is critical for investors to identify opportunities and maximise a company's performance, writes George Malim

Duke Equity Partners is among the first private equity firms to have identified the opportunity for investment in India and has delivered its investors a four-fold return over the 18 month existence of its first fund focused on making investments in India. Duke specialises in providing capital, advisory services and strategic execution to ­support growth at early and expansion stage companies in the Indian market that are typically undervalued.
Stanton Dodson, Duke's founder and managing partner, was introduced to the opportunity in India by Gopal Patwardhan. At the time, Patwardhan was running a spin-off company of NASA that Duke had invested in. Patwardhan, now a managing partner of Duke, is also a founder of IndiaCo, a successful Indian technology incubator started with his brother, Rahul Patwardhan.
"When we invested in the NASA project and started to explore the Indian market, it was clear we had the opportunity to build the first US-India private equity corridor," said Dodson.
However, identifying an opportunity without understanding the market does not make for an attractive proposition, says Patwardhan whose family has been at the heart of Indian society for 600 years. "We know the market very well and as a family have been involved in various ventures such as a bank, a power company and several manufacturing companies since the 1820s," he said. "We understand the culture and the mentality and have access to important Indian business contacts and resources."

Duke's primary focus is to invest in undervalued, high growth companies that are publicly-traded or that are privately-held that have the potential to be floated on the exchanges. The aim is to exit investments within 18 to 36 months. Patwhardhan explains Duke's approach; "We have a relatively conservative mindset. We're looking fundamentally for value – not necessarily the flavours of the day. We do not invest in companies with price-to earnings multiples of 30 or 40 but we do find companies with multiples of 10 or 15 attractive. Companies should have exciting technology, a great market and a solid management team. If a target company is lacking in one area, we will plug the gaps through drawing expertise from our global network of relationships or from within our own organisation."

The Duke team has over 40 years of collective experience in private equity as well as corporate finance, marketing and operations management. Duke draws on this experience to evaluate and foster growth at its portfolio companies. Through its alliances with groups such as IndiaCo and XLabs Global, a technology incubation firm that monetizes intellectual property from NASA, Hughes Research Laboratories (a shared corporate R&D facility of Boeing, Raytheon and General Motors), and other laboratories funded by the US Department of Energy and Defense, Duke is able to support its portfolio companies by developing or acquiring new technology as needed.

The Duke team has spent the last decade constructing models of successful investment and management strategy for early or expansion stage proprietary technology and the companies it selects typically demonstrate the potential to achieve a clearly defined set of characteristics.

Duke favours no particular industrial sector for investment and simply looks for companies in which it can create value. Recent investments have included one in a chemical company. By licensing technology to make nano-particles of calcium carbonate for toothpaste, the company has been able to significantly reduce its production costs and improve its profitability by 40%. The technology was acquired from one of Duke's research lab partners which include The Southeastern Universities Research Association in Washington DC, The International Advanced Research Centre in India, The National Chemical Laboratory in India, The Centre for Materials for Electronics Technology in India, The Kharkov Technologies Centre in the Ukraine, and DICTUC SA in Chile.

Another successful investment has been in a sheet metal pressing company that supplies the truck and bus manufacturing industry. Duke was able to bring in a Belgian company to joint venture with the pressing company that will outsource its assembly requirements to the Indian company in addition to sheet metal pressing. The deal has nearly doubled the company's revenue. The company is now planning an IPO slated for mid-year 2006.

Other investments include an Internet messaging company that has been transformed to a Voice-over-IP (VoIP) provider through the development of a suite of proprietary and patented applications.

In addition to capital, Duke assists in technology transfer and uses its network of contacts to build strategic alliances with global majors for companies in which it invests. Although Duke does not necessarily require that one of its partners joins the board of its portfolio companies, this has often been the case. Patwardhan and his brother both serve on boards of companies invested in by them.

"We have a very hands on management team of about 25 people in India," said Patwardhan. "We dedicate one person to each company who can then draw on the pools of expertise we have in-house in specific areas that range from helping companies present their financials to the markets assisting in structuring employee compensation plans or acquisitions."

"Our investment approach entirely depends on how we see the market evolving both over the short and long term," added Patwardhan. "With this in mind, we have made a small investment in an Indian bank because we see the financial sector as a key strategic area for long-term expansion."

Dodson adds "In addition to companies that take advantage of the low cost structure of India and deliver products and services in the US and Europe, we see immense opportunities for companies that serve the Indian market. India's GDP growth rate is about 7% per year, with a middle-class of 330 million and a savings rate of 29%, GDP growth is expected to cross 10% over the next few years. This is resulting in more than 15 million households being added to the middle-class each year."
Duke's investors are solely high net worth investors and family businesses since this provides an excellent opportunity to increase the scale and scope of the fund's network of contacts, as Dodson explains, "Our investor base is primarily from the US, Europe and the Gulf," he said. "Our investors are exclusively high net worth individuals or family offices. We particularly like to work with individuals and families because of the expertise and networks of relationships that they can bring to an investment. In addition, most of these types of investors have at least some experience of establishing a company and therefore understand the dynamics of the businesses we are investing in."

Duke does not discourage investors from getting involved with its portfolio companies. "Often we have investors that serve on our advisory board and we enjoy having access to their expertise," added Dodson. "The networking element is of critical importance as some of our investors in the Middle East, UK and the US have companies that could be either an acquisition target for an Indian company or potential joint venture opportunities. In addition, we've facilitated quite a few joint ventures and tie-ups between our portfolio of companies and those of our investors."

Family offices and family businesses are particularly useful investors, according to Dodson. "We are already working with family offices across the globe in an advisory role to acquaint them with the opportunities the Indian market offers and attract investment from them. India has more than 250 universties, 12,000 colleges and about 50 million individuals holding a graduate degree. Over a million engineers and science graduates enter the workforce each year. This presents a tremendous pool of ­talent for any global business."
"We have not taken a very significant investment from one single family because we like to keep our investor base broad so we can leverage the networks that creates. Families understand what it is to build a business and we're in the business of building businesses so it's a great fit."

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