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’India Satisfactory But Below Our Average Return’

By Shrija Agrawal

  • 18 May 2012
’India Satisfactory But Below Our Average Return’

Navis Capital, a firm specialising in making private equity investments in growth-oriented buyouts in South and Southeast Asia with $3 billion under its management, recently closed its sixth fund at $1.2 billion. The latest round succeeds its $1-billion Navis Fund V which it closed in 2007. The specific corpus for allocation from this fund in India is not known as Navis follows a highly integrated global network approach where all the partner firms (of Navis) invest out of the core global fund and do not house geography-focused independent funds. Navis, which has been an investor in India for quite some time now, has invested in India Hospitality Corporation (IHC), Nirula's and Mars Restaurant (Exited to IHC in 2007). Its other investments in India include ITM Trust, a tertiary & executive education service provider, and BSE-listed lubricants manufacturer Sah Petroleums. Rodney Muse, co-founder, co-managing partner and investment committee member, Navis Capital, talks to VCCircle on their fund raising experience, investment strategy and India portfolio. Muse, an active South East Asian investor, also shares insights on investing in the emerging economies of Indonesia and Vietnam. Excerpts:

Navis recently closed fund VI at $1.2 billion, which exceeds the fifth fund.  Give us a sense of the fund raising experience?

It has been the most challenging fund-raising environment since the inception of the firm. This is just the result of allocation constraint on the part of institutional investors as well as their requirement for greater degrees of information and comfort. It’s been a good process in our view, and we are pleased to have it behind us.

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I think LPs want more information about everything: the portfolio, the team and they are intensely interested in the commerciality of the terms. The power base has shifted from GPs to LPs and LPs are asserting themselves in ensuring that they are getting fair returns relative to the market and one that aligns GPs and LPs.  We have had pretty constructive discussions around how the alignment exists.

What helped Navis the most in fund raising?

We are the same group of founding partners since the day we started, so there is continuity. Also we have transparency. All of this differentiates us from younger firms or those who have been less transparent.  One of the key things was that we have not changed our strategy.  We do one type of thing which is buyout.  We are looking for exact kind of opportunities in India that we were looking for in fund V.

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Why a Shariah-compliant component to fund?

There are number of reasons - we invested in number of economies that have a Muslim base like Malaysia and Indonesia, so  it helps to have Shariah-compliant funds in terms of goodwill and in terms of deal structuring and deep transactions that you can do.  It also opens the door to new type of investors. So, it’s a got a fund raising and deal flow benefit.

How important is India as a market for Navis?

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India is an important economy for us. We have been investing for over five years and expect each of our funds, going forward, to have an exposure to the Indian economy.

What is the kind of allocation going from the current fund?

Something like 15-20% would seem like a good exposure for us.  We are not country-specific but look for regional diversification. South East Asia is our largest market if you aggregate all different economies but India would be just behind that. We have committed a lot of time and resources in understanding that market (India).

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You are an active investor in South East Asia. How does India fare against China?

We don’t have an ordering, we look at relative risk-reward in all the geographies we cover. We are not particularly active in China. If every fund wants to be in China, it’s more like a fad. We want to see the best opportunities and make a determination whether that is a good risk-reward relative to other regions. We haven’t put huge resources in finding Chinese opportunities as we think there is a logic for a country fund to cover most types of investments in that economy.

Navis is an active S East Asian investor, we see a lot of action happening in the economies of Vietnam & Indonesia. Are these the new emerging sweet spots for investors?

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Those are very active and efficient markets as there is lot of money chasing them. We are prepared to keep to our discipline not overpay to get exposure there. It’s a general quest, they are both high visibility niche economies and someone who wants to access Vietnam & Indonesia, has to think how they are going to access it.  If you think in terms of combined GDP, and population, it’s quite large in terms of the opportunity set, and these regions alone are there in the LPs’ radar screens, but the question is how to deal in these economies, which are emerging and complex. So, these are markets, you should assume pretty high returns with regard to reasonably high risks.

How has India evolved as a market for Navis over the years?

We have had investments where some have done better than others. Most investments are in increasing consumerism, hotels, catering and fast food. We believe that the investment thesis still has lots of legs to it and we look for other investments as well that offer different type of exposure to India. 

Navis pretty much focused on Food & Beverages in India. How much do you think that strategy has paid off?

We are not singularly focused on F&B, it is an area that we know a lot about. But, we will keep looking at other areas too. We are looking at automotive, oil and gas, services and education. We have consciously stayed away from financial services as we think that it is a cost of capital game and requires specific expertise. India has been satisfactory but below our average return as a result of small set of investments done in India.

We still believe we can have a good track record in India and we are committing resources for building team and capabilities to do that. We have a good core team in India, who are getting more experienced with investment scheme and Navis’ approach towards investing.  The team has to be on the ground and not on fly-in-fly-out basis.

How does the deal flow look like now?

Nothing specific but good deal flow pipeline in india. We are in active discussion with sponsors and expect to transact in India in the next six months or so. We have had some successful exits from India.

How does the overall India portfolio look to Navis. Not many exits though?

That’s the way private equity is. You have some outperform, underperform and a few meet your expectations. That sort of blend, if managed properly, can deliver good returns.  You expect every business outperforms but that’s unrealistic. I would say, specific to India, it is a place we rate highly. But it is very competitive with a lot of funds emerging. In that, it differs a lot from most economies in terms of risk capital being scarce. 

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