Govt Must Allow Domestic Savings to Play a Greater Role in Private Markets, Says Gopal Jain

The idea behind Gaja Capital was to invest in the domestic market opportunity or domestic demand. At the time [2003–04], most people felt safer to invest in USD/INR cost arbitrage businesses: companies with dollar revenues and an Indian cost structure. That made sense at the time because Indian macros were weak, the rupee was volatile and the legal structures were uncertain.

There was a degree of national pride involved too. I genuinely felt that the best Indian private equity [PE] firm should be an Indian one.

I reminded them that the US was a domestic consumption story and that this will eventually play out in India too. Finally, you have to sell your own credibility. I had a track record. We also decided to put in a lot of skin in the game. And a lot of GPs [general partners] don’t do that.

The most important thing is you have to raise the money yourself. And this is very important for new GPs to understand that you can’t raise money by attending conferences. In order to sell to foreign LPs, you require persistence. You need to meet them over and over again, and you need to do it yourself. Nine out of ten GPs will say, ‘Oh, I hate the process of raising money.’ But it’s not a choice.

You have to be prepared for two or three days of travel to do one meeting, which may last no longer than an hour, if you’re lucky. And you have to do that four, five, six times to get a commitment.

One of the fundamental tenets of this business is the ability to raise pedigreed capital at low cost. Otherwise, there is no value accretion in the business.

For the longest time, I don't think India was seen as an economic story. Today, we are a $4trn economy. The size, the might and the promise of the Indian domestic markets are known globally. The story has changed.

But that does not mean that raising money for India has become easier. Firstly, US exceptionalism has also made it tougher to convince global investors why they should invest in India. The returns in US markets over the past 10–15 years have been truly spectacular. It doesn’t help that the rupee continues to depreciate steadily over time.

India does not yet deliver returns that compensate for the risk. India manages to attract diversification dollars, not performance dollars. That will hopefully change, down the road.

Fundamentally, the answer is volatility. Our public markets are no longer completely dependent on foreign flows and the mood of foreign investors. In the past few years, despite the global stock market being in choppy waters, the Indian stock market has been stable because of domestic investors.

The same needs to happen in the private market. It is absolutely essential for a country the size of India that its economic aspirations should be tied to its own funding infrastructure, which is why you need domestic capital. Just as you need domestic banks, insurance companies, you need your own LPs and GPs.

LPs are the source of capital. GPs are the managers. Foreign LPs will be comparing India relative to the entire world. Whereas domestic LPs will be looking at the Indian story and investing in it from a much longer-term perspective.

We're not a globally significant private market. At $50bn a year, we are still a relatively small private market. Around $100bn a year is when you become significant. If you want to become a $200bn-a-year market, can you depend entirely on foreign capital? You can't. Foreign capital can take you only so far.

One still can’t raise a lot of money in India. It’s very expensive money. And a lot more needs to be done to improve the institutional supply of domestic capital.

Today our unicorns are significantly owned by foreign investors. Domestic investors don’t get an opportunity to own our unicorns until the time they become public. So, the entire upside from zero to a few billion is captured by foreign investors.

Look at Flipkart. Flipkart will be $35–36bn when it gets listed. What about the journey from zero to $35bn? Why should this not be available to retail investors in India? The government must undertake reforms to allow domestic savings to play a greater role in India’s private markets.

We have to remove the barriers between domestic savings and domestic private markets. These barriers are idiosyncratic barriers that no longer have any relevance. They are out of sync with the rest of the world.

For example, Indian pension funds and charitable trusts are not allowed to invest in private markets. Our banking and insurance players need to invest far more in Indian private markets. Our banking system has $2.5trn of deposits. Mutual funds have $700bn of AUM [assets under management].

By contrast, the total domestic capital into AIFs [alternate investment funds] so far is about $50–60bn. All we need to do is remove the roadblocks.