Emerging Market Makers
India's Edelweiss Capital has made its reputation--and fortune--by modeling itself after Wall Street titans.
By Duff McDonald

(Business 2.0) – Take a walk through the high-rise offices of Edelweiss Capital in the Nariman Point district of Mumbai, India, and you'll see many trappings of Wall Street's premier investment banks. Montblanc pens protrude from the shirt pockets of sharply dressed workers. Desks are cluttered with lucite tombstones commemorating completed deals. Spiral-bound pitch books herald deals to come.

It's easy to think that someone has tried to clone Goldman Sachs--halfway around the world. It's easy because it's true.

Ten years ago Edelweiss founders Rashesh Shah, now 41, and Venkat Ramaswamy, 38, set out to build a global financial services firm capable of competing with the likes of Goldman, Merrill Lynch, and Morgan Stanley. It would have been no easy task in New York or London (as Lehman Bros. and Lazard Frères can attest); trying it in Mumbai in 1995 was almost laughable. At that time India's financial markets still lacked crucial basics, such as a derivatives exchange and a tough regulator. Nevertheless, the pair pooled $250,000 they'd collected from their families and while working together at Icici Bank (India's second-largest) and founded Edelweiss.

No one's laughing now. Though still a boutique shop compared with premier Wall Street firms, Edelweiss shows how a mature U.S. business model can find plenty of room to grow in emerging markets. The company offers all the services of a full-fledged investment bank, including equity research, trading, institutional brokerage, and corporate finance advice. And its local knowledge is helping it beat out rivals for deals. In fact, these days Edelweiss is often mentioned in the same breath as the Indian joint ventures of its Western idols, such as Goldman's Kotak Securities, DSP Merrill Lynch, and J.M. Morgan Stanley.

Just ask Ernest Cu, chief executive of SPI Technologies, a business-process outsourcing company based in the Philippines. Cu chose Edelweiss over every local and Wall Street firm operating in India to advise him on a $90 million management-led buyout of SPI in 2004. "Edelweiss demonstrated a very intimate knowledge of our market, a good sense of who the potential buyers could be," Cu says. "When it came to the other banks, I could have been the CEO of a garment company for all it mattered in their presentations." Edelweiss is now SPI's adviser on mergers and acquisitions too.

This sort of client satisfaction has helped Edelweiss grow its investment banking portfolio to a total of 80 public and private financings worth $400 million. Where organic growth wasn't fast enough, Edelweiss--like a true Wall Street institution--has happily bought its way into a market. In late 2000, Edelweiss acquired institutional brokerage firm Rooshnil Securities for $2 million. That business unit now does $125 million in derivatives trades each day, more than 10 percent of the Mumbai exchange's total daily volume. From just eight employees and $350,000 in fee revenue in 1999, Edelweiss now has 340 employees who generate $30 million in annual revenue.

To build a premier investment bank in India, Edelweiss looked to America's best firms as models. For example, the startup imported Wall Street's practice of using "analyst programs" to recruit talent, hiring undergrads from India's Sydenham and St. Xavier's colleges and training them for two years before turning them loose to attend business school. Some return, some don't. "It's starting to become sexier to come back to India," CEO Shah says. "Not everyone wants to be the 21,000th employee at Goldman Sachs."

Following Wall Street fashion, once Edelweiss has its recruits, it pays well to keep them. Salaries are competitive, but Shah and Ramaswamy have also committed a third of the firm's equity to employee stock grants and options, a Western practice that is still nearly unheard of in India. In an industry known for its revolving door, Edelweiss has lost none of its 16 senior managers in the last five years.

But as competitive as Edelweiss is in recruiting and retaining talent, it's too smart to chase the same deals as larger competitors. Wall Street firms target India's high-profile IT services companies like Infosys and Satyam Computer Services; Edelweiss courts lesser-known midcap shops such as Hexaware Technologies, iGate Global Solutions, and Mastek. The premier investment banks love to manage initial public offerings, so Edelweiss concentrates on structured financings like the SPI buyout instead.

Shah still sees India as greenfield territory, noting that 90 percent of foreign investors' money is committed to equities. Few banks offer other investment options, which clients badly need to diversify their risk in India's volatile market. So Edelweiss will. It aims to raise two new funds in the coming year: one for real estate investments and a second for arbitrage plays (in which investors buy and sell an asset in the U.S. and Indian markets simultaneously to exploit a price differential).

The firm currently has $600 million in corporate finance deals on deck--more than it handled in its first 10 years. That's a good indication of Edelweiss's growing stature. So is a recent $150 million buyout offer for the firm--a tidy 99 percent annualized return on the founders' investment. Not many Wall Street bankers would hesitate to copy that.

Duff McDonald is a freelance writer based in New York.