• Healthcare delivery.
• Food and Agriculture
• Clean Technology that addresses basic needs.
• Selective parts of education and skills development.
• Services and products for semi-urban nd rural markets.
• Infrastructure in specific sections supported by the government and addressing

Name the sectors that you will not look at investing in 2009

• Consumer Internet/ Web 2.0 (people will stop paying for eye balls)
• Off-shoring KPO/ BPO (scalability issues/ increasing costs/ less differentiation)
• Pre Revenue Businesses that have high consumer acquisition costs and longer break even periods (e.g.: online travel/ hospitality industry)

Is there a change in the way you evaluate an investment proposal?  Will it take longer for you to close a deal than compared to what you did it at a boom time like late 2006 or 2007?
The way we evaluate the investment proposal is exactly the same as before. Before, we were not too concerned about the company being within two years of an IPO, neither are we now.

Do you see more funds coming in to the market?
Yes more funds will come into the market, but investment will be lower than the period prior to September 2008. Statistics show that US based LPs account for ~70% of Indian PE Industry.  With credit crisis, recession and market meltdown most US LPs are faced with significant asset erosion and the pool of funds available is contracting.

Do you foresee distressed asset sale?
Distressed asset sale is likely to increase in a number of areas but perhaps still too complicated in the Indian context. If it is the secondary sale of an LP’s PE fund holding that’s pretty straight forward. But real estate assets backed by banks, businesses with assets and operations, these kind are likely to have many stake holders and regulatororily comlex to resolve.

Do you see more buyouts (controlled transactions) in 2009?
Probably not. Buyouts are driven by (a) availability of leverage (b) management difference with shareholder or promoter’s willingness to cede control.

• Availability of debt to finance buyouts is still scarce in India
• Indian Cos. are largely promoter driven where the promoter is both the shareholder and the management – more often than not promoters are against ceding control

Based on the above hypothesis, we many not see more buyouts.

Do you see an increase in PE-backed acquisitions?
Yes. Companies that have built competitive advantages, and will find this a great time to grow by acquisition. While debt will be available, PE funding will be required to get leverage.

We will publish this in two parts. This is Part-I.

Will you see a slowdown in private equity deal-making in India in 2009?
The obvious answer is “yes”! Having said that is there a less obvious answer? There will certainly be a slowdown for all the obvious macro reasons: Amount of monies available from fund-of-fund investors for PE funds. This has come down dramatically from all reports, and as per some accounts some LPs who have committed are withholding; and all the deals that looked ‘hot’ when the economy was bubbling away, now will appear droll.

But if one looks between the lines, it is possible that in some areas investment will actually be more than the previous years in terms of VC/PE investing. (How insane is the view of mine, only time will tell) The increase will come because of two things: First, India’s growth (slower growth no doubt), but it is not a recession like in other countries; and second, because of India’s basic needs which will specifically spur continuing demand in some sectors.

My crystal ball tells me, that the deals that will get funding are those: (i) that have already built significant competitive advantages and have revenue and profit traction (but there will be very few; of these most would have raised capital already), or (ii) those that expect to further build on these competitive advantages, as well as become profitable within a round of funding (which I call as ‘early-growth’ or ‘rapid growth’ companies). It is in these early-growth businesses that I expect to see a jump in deal making.

Secondly, I expect to see investments increase in sectors that are typically secular and more importantly India still has a great demand – supply gap for. These deals will be both in early stage, early-growth, as well as in growth stage. These sectors include healthcare delivery, food processing, agriculture efficiency improvement plays, clean water availability, localised waste management, energy generation and distribution related services; ‘infrastructure build-up’ support services, etc.

How do you see private equity exits in 2009? What is your opinion on IPOs and M&A based exits, and how will they fare in this year?
My view is that both these will be low. Again, of the two types of exits, M&A’s are likely to proportionately do better than IPO’s. Importantly, this is a good time to build value, and not exit investments! The returns, for say a two year delay in exit, could make significant positive difference to the overall return of that investment. But then this needs nerve and patience on the part of the fund manager, as well as skills in monitoring and adding value operationally.
Where exit is a must, merging with a company for stock (whether listed or unlisted) could be a preferable option than a cash transaction and we might see more of those.

Will private equity investors prefer to invest in a listed-company or in a privately held company?
The writing on the wall is clear now. What matters now is not whether the company is listed or unlisted, but more whether the company has built a competitive advantage in a space that is not declining. But there will be issues with listed companies because of the limited ability to have clauses that give preferential rights to the PE investors. While the obvious carrot with listed companies is their very low valuation (market listing), but when it comes to taking on investment, the listed company management is still likely to hang onto rosy valuations for painfully too long a period, driving away PE investors.

How do you see the valuations this year? Do you see entrepreneurs adjusting their expectations in tandem with public markets?
Valuations for unlisted companies will adjust in tandem to their listed brethren, if they are early-growth as opposed to more mature growth stage companies. The more mature growth stage companies will hold out for a higher valuation as there will be more PE fund managers chasing them, rather than the early-growth stage companies. Pure early stage companies always had more reasonable valuations and they will continue to adjust further.

Welcome to the Honourable Minister, Shri Malla, Shri Sinha, Shri Viswanathan, Shri Prabhakar, Shri Gopal Srinivasan, well wishers, entrepreneurs and mentors, the media, and my colleagues from BYST and VenturEast.

Sarath with Hon'ble Minister Shri. P. Chidambaram during the launch function

If a commercial, crass vulture capitalist like us, Ventureast; If a non-profit organization like BYST; If sophisticated institutions both international and domestic that typically focus on big initiatives not small ones like ours, such as the IFC and SIDBI; If Industry captains such as Prabhakar of Newgen, Kris Gopalakrishnan of Infosys, Dr. Anji Reddy of Dr. Reddys; and others pick this effort despite many other worthy options to support; If eagerly sought after IIT and IIM graduates such as Pranay and Snigdha come and work for a pittance; If a leading micro-equity fund manager like Aavishkaar can join in; And finally, and importantly, if an important Minister follows an initiative from his past portfolio despite the huge commitments of the current portfolio, and if all these have come together, then the time must have come !

The time must have clearly come ladies and gentlemen, if at 8AM in the morning on a weekend you are assembled here to witness this launch and for that I thank you.

Ladies and gentlemen! The time of the small entrepreneur has come!

The time has come to make a difference by joining hands with the micro-entrepreneurs of the country. The small entrepreneur is already making a difference to the country despite the odds that they face. It is reported that 90% of the total enterprises of the country are lead by micro-entrepreneurs! It is obvious that removing some of the blocks that these small entrepreneurs face, and giving them similar support as their larger bretheren, can have a huge impact on our nation. Supporting these small enterprises must and will lead to huge employment generation and economic growth for the country across the board!

Now I quote from an inspiring leader who is also considered to be tough, and a task master,

Progress is not always on a linear path, nor is it inevitable. Two thousand years ago, Saint Thiruvalluvar said, ‘aran izhukkathu allavai neeki maran izhukka maanam udayathu arasu’ (they are good rulers those who observe ethics, commit no crime and walk the path of honour and courage). If we bring thought and passion to our governance, and walk the path of honour and courage, we can make the future happen. And this century will be India’s century.

To that I add, this will be India’s century because it will be the century of the small entrepreneur

This leader I quote from is none other than the Honourable Minister Shri. P. Chidambaram. (The Chief Guest of the function)

In this blog, we look at the impact of the current global financial crisis, and the strategies that seem appropriate in its wake. We will introduce our life sciences fund in the next post.

The investment opportunities in India are being driven by the needs of specific markets, rather than industry sectors. For perspective, the 9%+ growth in India’s GDP in the past few years have come primarily from the urban/metro markets, and from infrastructure/large enterprise sector. While the growth in these sectors will continue, it is expected that the bulk of India’s future growth will come from the semi-urban and rural markets and from serving the small and medium enterprises (SMEs). This was the going-in investment thesis of the Ventureast Proactive Fund (early-to-growth stage investments) as well as Ventureast Tenet II fund (seed stage investments) in mid-2007. But the question now is, “Is this hypothesis still valid in the current global meltdown scenario?”
Pundits around the world and in India are still trying to make sense of what is happening, find parallels from the past and come out with action steps. We recently held the annual investors’ meeting of our funds, with some savvy investors and experienced investee company CEOs, as well as a couple of well-known economists in attendance. Expectedly, the discussions, both by design and by the sheer every-day impact that it would, had to veer to action steps in the current scenario. The messages were very instructive, and as a Fund Manager we are certainly fortunate to have had this input.

1. It’s not the ‘end of the world’! Both the Indian economy and its stock market will move up, with the next stock market peak projected to be about four years on.
2. Some of our savvy investors, who have been away from the public equities since the early signs of a slowdown last year, are now back into the public equity markets of developing economies with significant commitments.
3. India and China will still grow robustly, despite some slow down. India is expected to grow at a reduced annualized rate of 7-8%. Investment opportunities and challenges would be very similar to the past, but will require one to focus more on the “fundamentals” of investing and business building.
4. Private equity/ venture capital valuations will have to be really sharp in order to compete with PIPE (private investment in public equity) deals, where valuations have come down very dramatically, indicating that the way forward must include PIPE deals.
5. A detailed discussion on which sectors to focus on indicated that the impact of the current stock market downturn is expected to hit the urban segments more than the semi-urban and rural segments, but the SME’s could be worse hit. The industrial sectors that appeared most secular or even growing faster appeared to be healthcare, education, food & agriculture, and distributed energy & clean energy/water.

Investee Company Founders were clear in their message of the need for rapidly improving productivity, making every rupee/ dollar count. They had developed plans to last through the next 18-to-24 months with their current funding. This is the way to go because PE/ VC investments at the early stage might dip a little with the funds focussing on attractively priced deals in public equities. There will still be early stage investments made, though lesser in number and smaller in size, in companies that are ‘fundamentally’ strong in sectors mentioned above.