Summer 2010

PROFILE: Passage to India

IndiaInternational in focus, Kotak Mahindra Asset Management hopes tobecome the first port of call for foreign investors, reports Fiona Rintoul. ‘Think Investments. Think Kotak’. So runs Kotak Mahindra Bank’s corporate slogan. And it’s a mantra that Kotak Mahindra Asset Management Company Limited (Kotak Mahindra AM) has sought to export worldwide, as it seeks to make itself the first port of call for international investors looking for exposure to India.
Launched in 1998, Kotak Mahindra AM is a wholly owned subsidiary of Kotak Mahindra Bank, one of India’s first privately owned banks. The bank, which this year celebrates its 25th anniversary, started life as a corporate in the days when India’s banks were state run. It converted to a bank in 2003 – the first time in India’s history that a corporate has done this – when it received one of two banking licences granted to private-sector enterprises. For this reason, says Shyam Kumar, CEO of Kotak Mahindra (UK) Limited, the international arm,  Kotak Mahindra describes itself as a “20-year-old new bank”.
Since the company was founded in 1985 by Uday Kotak, who, says Kumar, could have gone to work for any of the big international banks but preferred to roll out his own venture, growth has been breathless. When Kumar joined the bank in 1992 it had around 100 employees. Today, after what he describes as “a wonderful story”, Kotak Mahindra Bank employs 20,000 people across the group and has a market capitalisation of $7bn (€5.7bn).
Alongside asset management, the group’s business spans retail and investment banking, life insurance, wealth management, real estate and private equity. It has over 260 bank branches in India, where it is the fourth largest bank overall and the third largest in the private sector. “In wealth management,” says Kumar, “we are arguably the largest in India.”
But what really sets the Kotak Mahindra group apart among Indian financial services companies is its international business.
“Internationally, Kotak was very much ahead of its time,” says Kumar. “We had our first international office in 1994 and in 1995 we opened in London. We were one of the first Indian financial services players to come outside India and we are one of the few Indian players to have a significant presence both at home and abroad.”
Kotak Mahindra learnt how the international markets work from the masters of universe. On the investment banking side, it had a ten-year relationship with Goldman Sachs. “We got a fantastic understanding of how international business works because of the Goldman Sachs joint venture,” says Kumar.
The investment banking JV was recently wound up when Kotak Mahindra bought back the Goldman Sachs shares, but a joint venture on the life insurance side with Old Mutual persists. The South African company owns 26% of Kotak Mahindra’s life insurance entity. International focus
Today, alongside its office in London, Kotak Mahindra has offices in Dubai, Singapore, Mauritius and the US, where it is present in both New York and San Francisco. Kotak Mahindra Securities also has an office in Bahrain. In total, about 60 staff are employed outside India. Their objective, says Kumar, is “to provide Indian solutions to international investors”.
This is stage two in a four-stage business plan. The first step, says Kumar, was to provide Indian solutions to Indian investors. The third stage – already embarked upon – is to provide global solutions to Indian investors. This isn’t a key strand at the moment, partly because Indian investors are heavily focused on the domestic market due to the high growth rates available, and partly because exchange controls have not been opened up completely, although, at $200,000 per person, limits on investment overseas are now generous.
“There are investors who have been in India for many years, who would like to look at diversification,” says Kumar. “We are working on that opportunity and we have identified a few players we could work with.”
At the moment, the Kotak Mahindra AM range available in India includes a global emerging markets equity fund and the Kotak Indo World Infrastructure fund, which invests in companies likely to benefit from the growth in infrastructure spending in India and across the world.
The fourth stage – global solutions for global investors – is very much for the future.  However, a significant step to facilitate stage two was taken two and a half years ago when Kotak Mahindra (UK) launched its Luxembourg Sicav in 2007.
It was perhaps not the very best of times to launch the Ucits III-compliant Indian Multicap subfund. “The global crisis had nothing to do with India, but India suffered,” says Kumar. But after a stuttering start caused by the 2008 credit crunch, investor interest has picked up enough for Kotak Mahindra AM to add two further subfunds: the India Infrastructure and Realty fund launched in November 2009, which invests in companies operating in the infrastructure and real estate sectors rather than in the assets themselves, and the Indian Growth fund, which focuses on large-cap investments, launched last March.
Investors who were sitting on cash are now redeploying it, says Kumar, and European investors in particular are increasingly allocating to emerging markets. “Money will move at a higher pace towards the East, and India’s share of that will increase,” says Kumar. “Institutional investors are increasingly looking at allocations to India.”
In the future, Kumar expects India to compete particularly well against that other great emerging markets hopeful: China. When people argue that India’s infrastructure is not as good as China’s, Kumar likes to point out that India is achieving the same growth levels, despite its poor infrastructure. Think, then, what it will achieve when the infrastructure improves.
The main theme driving an anticipated Indian GDP growth rate of 9% for this year is the same as that driving Chinese growth: domestic consumption. As India urbanises, consumption will increase, says Kumar; people moving to the cities will buy houses and consumer products.
To do this, they will need financial services products, and so he is particularly bullish on the banking sector. “Consumption will increase and the banking business will benefit,” he says. “India is still very underpenetrated, and so the scope is huge.”
To better capture the many international investors who will want exposure to India’s growth story, Kotak Mahindra is stepping up its international operations, investing in products, people and technology.
“We are investing more and more resources in the international business now,” says Kumar. “The opportunity is big and we are well positioned to benefit because we already have 15 years’ international experience. We can only build on that.”
Thus, Kotak Mahindra AM plans to launch more Luxembourg funds and to bring funds currently domiciled in Mauritius to Luxembourg. A Luxembourg domicile is an essential prerequisite for many European investors, and Europe is viewed as a key target market by Kotak Mahindra AM, not least because it has a familiar feel for the Indian company.
“India and Europe are similar,” says Kumar. “In India each state has its own language and culture. We understand that about Europe because we have it back home.”
This understanding may help Kotak Mahindra AM avoid some of the mistakes made by US firms when they first started selling products in Europe. Who can forget encountering visitors from across the pond in the early days who seemed genuinely to believe that one day soon everyone in Europe would speak English as their first language?
Kotak Mahindra AM seems much less likely to look for one-size-fits-all solutions. Certainly, Kumar, who is in charge of global distribution of Kotak Mahindra AM’s funds, displays a keen awareness of regional differences when talking about his distribution strategy.
“It depends on the jurisdiction,” he says. “In the US we work with a lot of pension funds and endowments. In Europe, it’s more private banks. In the Middle East, we work with a lot of family offices. In certain regions local banks are more powerful than national banks.”
A diversified approach is also one of the main benefits Kumar believes his company can bring to international investors looking to invest in India. While other companies may offer an India fund – possibly managed from London, Frankfurt or New York – Kotak Mahindra will ultimately offer a whole range of India funds.
“The India story can be cut in different ways,” Kumar says. “We want to give all possible solutions.” ©2010 funds global

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