Blackstone’s Investment Strategy in India: Insights from Jonathan D. Gray

Private equity investments have been a significant driver of foreign direct investment (FDI) inflows into India, with Blackstone leading the charge. In an interview with Bode, Jonathan D. Gray, the president and chief operating officer of Blackstone, shares his insights on the firm’s investment strategy in India, the impact of interest rates on deal-making, and his expectations for the country’s future under the current administration.

Interest Rates and Investment Activity

When asked about the likelihood of a Federal Reserve interest rate cut and its potential impact on investment activity, Gray expresses optimism. He believes that inflation will continue to decline, albeit at a slower pace than last year, giving the Fed the ability to lower rates. However, he anticipates that the Fed will remain cautious to prevent inflation from reigniting. Gray expects one or two rate cuts this year, possibly in the middle of the year, which will contribute to the recent increase in M&A activity and stock market rallies.

Lessons Learned During Elevated Interest Rates

Gray emphasizes the importance of having the ability to weather shocks, such as the rapid rise in interest rates, by maintaining resilient capital structures, owning good businesses, and diversifying investments. He stresses the significance of perseverance during challenging times and avoiding losing heart too early.

Expectations for Modi’s Potential Third Term

With the widely anticipated return of the current administration to power in India, Gray expects the government to continue its pro-growth path, encourage foreign direct investment, and implement reforms that facilitate investment in the country. He commends the government’s efforts in reforming dispute resolution mechanisms, improving access to capital markets, and supporting commercial activity through reforms in GST and bankruptcy laws. Gray also highlights the government’s focus on accelerating infrastructure development, which has significantly reduced travel times and facilitated commerce.

Areas for Further Improvement in India’s Business Environment

1. Delisting: Reducing the threshold for delisting companies from the current requirement of 90% of outstanding shares to make the process more feasible.
2. Listing of Foreign Companies: Simplifying the process for companies not domiciled in India to list on Indian stock exchanges.
3. M&A: Streamlining the merger process to reduce the time taken for tax-free mergers, which can take a couple of years in India compared to a couple of months in the U.S.

Blackstone’s Real Estate Success in India

One of the remarkable features of Blackstone’s 20-year journey in India is its emergence as possibly the biggest owner of real estate in the country. The firm has also been a pioneer in listing Real Estate Investment Trusts (REITs) in India. Gray highlights the positive impact of the growth of the Indian public markets, both for real estate and capital markets, in facilitating investment into the private markets. Blackstone has taken three of the four public REITs public in India, and Gray sees potential for further growth as the government opens up access to regular mutual funds outside of balanced funds.

India’s Importance to Blackstone

India holds a significant position in Blackstone’s global investment strategy, ranking as the firm’s biggest investment market in Asia and third in terms of equity investing, following the United States and the United Kingdom. Gray expresses excitement about the firm’s nearly $50 billion in investments in Indian real estate and companies, with more than 100,000 employees. Despite the impressive figures, he believes that Blackstone is still in the early stages of its journey in India, given the country’s strong fundamentals and the firm’s excellent team on the ground.

Blackstone’s Investment Focus in India

Blackstone aims to continue expanding its investments in India, focusing on several key areas:

1. Made from India: Companies exporting from India to the rest of the world, such as EV parts manufacturer Sona Comstar and IT services.
2. Made for India: Companies serving the growing Indian middle class, including healthcare, financial services, housing, and travel services.
3. Energy Transition: Opportunities in the energy sector, given India’s growing energy needs and the global push towards sustainable solutions.
4. Real Estate: Supporting the firm’s other investment efforts through IT parks, logistics, and data centers.

Lessons Learned and Future Outlook

Gray acknowledges that Blackstone made mistakes early on in India, such as not being as focused or concentrated in their investments and being too passive as investors. Over time, the firm has learned to take bigger stakes, partner with management teams to help build their businesses, and concentrate on high-conviction sectors. These lessons have led to India delivering Blackstone’s highest returns geographically in private equity.

With a long-standing presence in India, exceptional teams, a strong track record, and great partners, Blackstone sees a large opportunity set in the country, driven by the fundamentals of the economy and the ongoing changes. Gray expresses excitement about spending time in India and believes that it is a good time to be invested in the country.

Conclusion

Blackstone’s investment strategy in India is rooted in the firm’s long-term commitment to the country, its focus on partnering with management teams to build businesses, and its concentration on high-conviction sectors. With India ranking as Blackstone’s third-largest equity investment market globally, the firm sees immense potential for growth, driven by the country’s strong economic fundamentals and the government’s pro-growth policies. Despite the challenges posed by elevated interest rates and the need for further reforms in certain areas, Blackstone remains optimistic about India’s future and is excited to continue investing in the country’s growth story.