If private equity companies are so smart, why has India's Gokaldas Exports fared so badly since Blackstone acquired a majority stake in it?
In August 2007, private equity investor Blackstone paid up to $165 mn (or 275 rupees per share) to acquire 70% of Gokaldas Exports. Since then, Gokaldas has consistently lost money, and its shares – still traded on the Bombay Stock Exchange – are now trading at slightly over half that price (152 rupees).
The explanation given for Gokaldas' dismal performance is the generally depressed state of the world garment trade.
But, when Blackstone bought the business, the theory was that the new investors would introduce all manner of new customers. "They have a lot of investment in the textile and retail sector globally, which will help us get more partners to work with," Rajendra Hinduja, Gokaldas' managing director, said at the time of his new owners. Complete nonsense, of course. Blackstone had – and still has – next to no other investment in textiles or retail, and it is hard to see how any sensible business could kid itself a bunch of financiers would make Gokaldas any better at getting business from Western retailers than Gokaldas already was. With a client list that included Nike, Gap and Adidas, Gokaldas is by far the best-connected business in the Blackstone empire with apparel buyers: its presence might help future Blackstone clothing industry acquisitions – but Blackstone has brought nothing – and could never have been expected to bring anything – to Gokaldas' selling skills.
Where Blackstone might have been expected to improve Gokaldas' skills, though, was in general financial management. Gokaldas, though by some measures India's largest garment exporter, is a relatively small business, with sales around $200mn – most concentrated in the US. Its expertise in dealing with fluctuating exchange and interest rates is limited, and since the Blackstone acquisition its losses from mismanaged forex have grown. So they have at most of its Indian competitors. But forex losses at Gokaldas have soared since Blackstone took over: Gokaldas's first ever quarterly loss (in the last three months of 2008) was entirely due to a $5 mn hedging loss on exchange contracts negotiated, implemented and maturing under Blackstone management
And Blackstone, if it knew nothing about selling to garment buyers, might at least have been expected to give Gokaldas some expertise on international financial management. The evidence seems to be, though, that Gokaldas has been if anything worse hit than its competitors by the forex problems that have plagued Indian garment makers for the past two years.
So if Blackstone has done nothing for Gokaldas' marketing or financial skills, what has it done? It's tempting to conclude buying Gokaldas (at the top of the market) was just another example of financiers' ignorant and blinkered arrogance, led more by the need to be seen to be investing in India than any sensible understanding of India's riskiness as a place to export garments from. "This favourable industry dynamic...[was a] key factor in our decision to enter into this partnership" said Blackstone's Indian head at the time – describing, apparently, the continuous decline Indian garment makers had displayed since quotas were abolished in their share of the world garment market .
In fact, though, two significant changes have happened at Gokaldas since Blackstone emerged on the scene. Gokaldas laid off more people when the recession started to hit in 2008 than its local competitors, and it's begun to take the local market – about which, pre-Blackstone, it had been contemptuous – seriously. Better yet, in our view, its attitude to the local market looks a great deal more realistic than the "invent a brand, buy in a few marketing graduates, then complain no-one's buying" approach that's typified other Indian manufacturers' attempts to turn themselves into retail dynamos.
Gokaldas' pilot launch of a 25,000 sq ft cash and carry operation in the Yeswanthpur district of Bangalore looks to have thought through the fact that the overwhelming majority of Indian clothes are sold through tiny retailers. The Yeswanthpur pilot seems to have started off from looking at what those retailers want, and helping them deal with their stockholding and problems.
Blackstone's claimed high-falutin' networking and sophisticated financial management skills seem to have done nothing for Gokaldas – and seem to have simply not been there. But it seems more than a coincidence that Gokaldas has developed both a harder edge in its operational management, and greater humility and pragmatism in its approach to domestic sales in India, since Blackstone came along. Common sense, rather than business-school snake-oil, may well be Blackstone's real gift to Gokaldas