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"Private Market Valuations May Correct Over 3-6 Months": KP Balaraj

30 April, 2012

Sequoia Capital India is clearly one of the largest funds in India – if not in terms of fund size but in terms of portfolio. They currently manage four funds (one of them being a growth stage private equity fund) with over $1 billion in assets. Half of the funds have been invested in 49 companies at last count. The money has gone into a variety of sectors such as IT/ITES, healthcare, financial services, retail, consumer internet, mobile and even FMCG and infrastructure sectors. Some of the recent investments include George Zacharias’s 7Strata (remote infrastructure services), Tribi Embedded Technologies (energy efficient motor control), Prizm Payment Services (electronic payment), and Cotton County (manufacturer and retailer).

Sequoia Capital India came into being in 2006 by way of a merger with WestBridge Capital Partners (it was founded in 1998-99) and the Silicon Valley headquartered bluechip VC firm Sequoia Capital. The firm in India is run by 15 people – among whom four are managing directors (Sumir Chadha, KP Balaraj, Sandeep Singhal and Surendra Jain), two operating partners (Naresh Malhotra and Mohit Bhatnagar), an Executive Director (Abhay Pandey), a Principal (Shailendra Singh) and four vice presidents. VC Circle’s Shrija Agrawal talks to KP Balaraj, one of the founding MDs of Sequoia Capital India, about the current investment climate, and if we are headed for a slowdown in dealmaking. Excerpts:

Considering the kind of macro economic situation that we are in (high inflation and interest rates and an economic cool-off), how do you see this impacting the VC/PE space in India?

I think both markets are different. On the venture capital side, generally, activity is not directly linked to the capital markets environment. I think many good companies were started in downturn globally, I would imagine that’s the same case in India so we are seeing a lot of interesting companies, getting started and doing well. So I don’t think on the venture side, we will see much of a slow down. Indeed, deals may take a little bit longer to close, as investors realign potential exit strategies, valuations and sort out other constraints, but I don’t think deal activity will come down.

VC investments may not be so much affected since it’s a long term play, but what about private equity investments?

On the growth equity, we are definitely seeing a slowdown for some simple reasons. Majority of investments in India, historically in private equity have been in PIPE which are public market investments. For such investments, the pricing is governed by SEBI rules, and most of the SEBI formula pricing would be at large premiums to where these stocks are currently trading. So you are going to see a slowdown in private equity activity in the corporate sector. Now, having said that, the overall amount of investment in private equity will still go up compared to last year because there are lots of other sectors such as real estate and infrastructure that are raising money. So the overall dollars in the space would increase than those in the previous years.

Do you see the PE valuations becoming realistic now?

I think valuations are more realistic today. On the later stage side and growth side, private equity transactions are benchmarked against public market peers. Across most sectors, public markets have corrected by 40% to 50%, so there will be valuation adjustment. But again every situation is different, there are a lot more different kinds of investors in the market as opposed to a few years ago. You have private equity funds, hedge funds, investment banks, you have foreign governments, so the number of investors looking to make private equity investments in India have multiplied.

How do you manage the expectations of entrepreneur and yours?

We are generally very long term investors. We have a very strong franchise in the market, very good reputation globally, so we attract a certain kind of entrepreneur and certain kind of company. Most of the investments we made and looking at currently is the first money in, or the first institutional money in and we generally stay invested for a long period of time. So I think from that perspective the external environment is important, it definitely reflects some of our thinking on valuations but it wont be the most important driver.

What are the sectors that you are upbeat about in the current scenario?

We principally invest in service oriented business models. We are not sector oriented investors, we are much more focused on companies and entrepreneurs. We are looking for well managed companies that are market leaders in large markets, where we can come in and partner as a long term investor.

Do you see tilting towards private equity of late?

No…both areas remain a strong focus for us.

How many exits have you had till now?

We don’t disclose. Three or four companies went public and three or four companies got acquired.

Can you give us an overview on your various funds? How much under management as of now? How much of it have been invested so far?

We manage four funds across venture and growth equity. We have three growth funds and one venture fund. We have about $1 billion of assets under management. Probably 50% of that has been exhausted.

Are you raising new funds? If yes, would it be a VC or a PE fund?

No comment. Funding is not an issue. We are not constrained by money in that sense. For us the challenge is to find enough number of good opportunities in the market.

Do you think fund raising has become difficult in the current market scenario?

I think for new funds it will be a very difficult fund raising environment. For established players, I think regardless of the market cycles, they will always be in good demand.

How do you rate the performance for your fund?

(Laughs) We are quite happy with what we have seen in the markets.

What is your IRR (internal rate of return) expectations for each of your funds?

An expectation of 25-30 % IRR for any venture capital-private equity fund is a norm in India.

Tell us your outlook on consumer focused businesses? Since the demand is likely to slow down in the wake of government’s clampdown on inflation.

I think for well run companies, the outlook is still good. They will manage through short term cycle. May be in the near term, some businesses would have to manage, e.g if it’s a retail business, they have to think through customer affordability before passing on any price increases.

Are you happy with the way consumer internet is shaping up? Are you allocating more funds to this sector?

Yes, we are always on the look out. We are happy with the way consumer internet business is shaping up. There’s no particular sector that we are focusing on.

Do you think Travelguru’s plans to focus on hotels is a good idea?

Especially when people are more interested in booking an air ticket online than an hotel room?

I think Travelguru’s hotels focus makes a lot of sense as flight market doesn’t make money.

Are you happy with Travelguru’s performance? There was a rumour that Travelguru is looking for a merger or a sell-out? Any truth in that?

I can’t comment on specific companies, but as investors, we are very happy with Travelguru and their performance has been very strong.

You have a heavy weightage into healthcare, finance, and IT/ITES sectors? Can you explain the story behind all of them?

Nothing, nothing at a high level. There are a lot of sectors that are of interest to us. As investors, we are always on the look out for good companies and good entrepreneurs.

And what do your limited partners tell you whenever you meet them?

They are generally happy with us. We have the same LPs for all our funds globally.

Finally, what is your outlook for your firm and the industry in general?

We are quite happy with our investments in India. We have a very good position in the market. Consumer oriented business across all sectors are a very big focus for us in our way forward. On venture business, the flow there is not linked to capital market environment, so we are seeing a pretty healthy activity on the venture side.

On the private equity side, valuations remain an issue, there is too much money in the market. Public markets have corrected 30-40% across sectors. In many cases valuations in the private market will correct over the next 3-6 months, there will be some lag between public market valuations realities and private market valuations.


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"Private Market Valuations May Correct Over 3-6 Months": KP Balaraj

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