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"Investments During Down Cycle Can Fetch Higher Returns"

15 August, 2008

Bangalore-based private equity fund 2i Capital recently announced the first closing of its second fund at $60 million. Named Indian Enterprise Fund, 2i’s second fund is looking at a final closing of $200 million. It will invest in the range of $15 million each in mid-sized companies operating in high growth consumer or industrial markets. The fund has been completely raised from foreign investors, mainly from Europe, besides Asia and the US. The sectors they like are transport, logistics, financial services and infrastructure, among others. 2i has so far invested about $200 million in companies like Pipavav Shipyard, India Infoline, Titagrah Wagons, Idea Cellular, Excel Telecom, and Gayatri Projects (most of which have been listed after they invested).

VC Circle’s Shrija Agrawal spoke to Vivek Sekhar, CEO of 2i Capital (India) Pvt. Ltd, on the current fund raising environment, investor appetite for Indian fund products, and 2i’s approach to investments. Sekhar, 45, has about 17 years of investing experience in India and abroad. He was ranked among Top-20 fund managers in Asia by AsiaMoney in 1998 (shared the same rank with Mark Mobius of Franklin Templeton). Excerpts:

Was it difficult to raise the fund in the current scenario?

No, it wasn’t. The institutions we were focusing on have already got allocations for Asia (as in investing in India and other markets). These institutions are very long term investors. They have seen several cycles of these upswings and downswings. Also, historically all across the world, whenever funds have been invested at down times, they have performed better. Because, they could get better valuations and also could catch the upswing.

Has fund raising environment become difficult for new players?

It is difficult for new players. There are a few more players who are raising monies now. Some are absolutely new, while some have done one or two products in the past. New players will have to distinguish and differentiate themselves from others. Investors such as pension funds and fund of funds very carefully analyse the experience and track record of the investment managers.

You just raised your fund. How are the foreign investors looking at India? Are they still upbeat on India?

Yes, they are. However, the happenings on their home front have made people a little conservative. The decision to increase allocations to India have happened over 3-4 years. International investors want to capture the growth that countries like China and India can offer. They are also looking at asset diversification away from their home markets in Europe or the United States. They look forward to capturing the increase in consumption in countries like India. If you look at the low levels of consumption or infrastructure or services in India, the current state we are in offers a great deal of attraction from investment perspective.

Some of our investors that visit us in India are 60-65 years old with deep insights and investment experience. They have said that the trends they are now seeing in India are comparable to the things and events that they saw in the 50s or 60s in the US. When people say they can relate to such growth trends, its exciting and holds promise.

Did you also have a network of distributors helping you raise the fund?

We did it primarily through our own contacts, because I have been handling international institutional money for last 15 years. The contacts have been primarily of our own at this stage. Only now we will be going for a distribution or a placement agent, because we are going to concentrate our time in investing it rather than spending too much time on marketing.

Who are your investors? How much of it is foreign and domestic?

All are foreign. We have fund of funds, corporates, family offices, and pension funds as investors. The major chunks have come from Europe at this stage and we have investors in Asia that are in process as well, besides the US.

So what remains your future outlook on the private equity market now?

It has been through a very interesting phase. There is more excitement to come. Even if you compare the present date to about seven or eight years back, the depth of sectors that require private equity are more, and the number of players have increased and matured. Also companies who take money from us have a better understanding and appreciation of our role and how we as shareholders are their partners in growth.

If you could tell us the IRR expectations of your fund and the payback period?

Although we are in the business of making a few multiples, on a conservative basis, we expect to give investors a 30-35 per cent return per annum. We expect the first returns to go back to investors in about 2.5-3 years. The full payback is in about 5-6 years.

Any particular sectors that you are upbeat about?

We like transport, logistics, financial services. We like services related to corporate training and education, auto ancillaries and sectors that are riding on the current expansion of the consumer and infrstructure markets in India. We will stay out of pure real estate, while we will invest in the infrastructure space (like infrastructure enabling companies).

How different is your fund from others in terms of positioning?

We as professionals have been investing in India since 1990. We have invested in many companies in the past and have seen many investment cycles. Our level of contacts in the market is very deep and we get good deal flow before many other people hear of it. These are two differentiators. We are also very good stock pickers in a way so we are able to invest in very good management teams. Our typical deal size is around $15 million and our focus is on the midmarket or SMEs.

How many investments do you see yourself making in a year?

In one year, we will be looking at making around six investments.

What is the kind of value do you see yourself bringing to the portfolio companies?

Based on what we have done in the past we provide inputs both at the strategy level and operational level. We provide value in helping investees hire new key level people or getting additional advisory or board members who can help operationally. We help in providing inductions to potential clients, OEMs or distributors. Occasionally, we also provide M&A related advice, and advise for companies going in for stock markets listing.

Would you be looking at making PIPE transactions? If yes, what will be the share of such deals in your portfolio?

We don’t expect more than 20-25 per cent of our fund to be in PIPEs. We will do PIPEs only to the extent that we have board memberships and we are involved in the strategy of the firm in terms of expanding. Typically we might do a PIPE when we have an investment in an unlisted company, then take up a PIPE stake and do a merger or a roll up. It should help with the growth strategy of both firms. We will not do a PIPE just for the sake of getting exposure to a sector or market. We won’t do secondary market PIPE transactions.

Funds entering in a bear market like this, if I may call so. Are you hoping to get some value picks?

We have started seeing improvement in value already. Apart from the fact that the environment is producing a better value, we are typically the first investors in most of the deals we do, and that has a price advantage in itself.

By when do you see yourself making the second closing?

We are targeting something by end of October-November. The second closing would be in another $60-70 million and the final closing of about $200-million.


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"Investments During Down Cycle Can Fetch Higher Returns"

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