Panellists at News Corp VCCircle LP Summit

An increasing number of general partners (GPs) and limited partners (LPs) at private equity firms are viewing India as an attractive investment destination compared with developed and emerging markets where political and financial market risks may hamper their bets.

At a panel discussion during the eight edition of News Corp VCCircle Limited Partners Summit, domestic and global PE professionals said India’s improving fundamentals, economic reforms and entrepreneurial spirit weigh higher in the context of economic, political and social uncertainties in the US, Europe, Britain, China, Brazil and Japan.

“It is India’s time under the sun now,” said Kay Mok Ku, partner at Gobi Management (Singapore) Pte Ltd, during the session titled ‘What can GPs do to position the India story better’. “Series A funding in China is very expensive right now. As a result, we are seeing a lot of Chinese capital flowing into India. We are looking at investing in some Indian funds.”

Gobi Management is a GP and manages funds in China, Hong Kong and Southeast Asia. For India, the firm is looking from an LP perspective because it has started a new growth fund as a joint venture with the Malaysian government. The firm is looking at investing in Indian startups to see how those investments can add value to its portfolio, Kay said.

Arvind Kodikal, senior investment officer at Triodos Investment Management BV, also shared a pro-India perspective albeit with slight caution. “What makes us happy at this point are India’s changing fundamentals on the ground and the entrepreneurial spirit compared with other markets. The government is not creating hurdles for entrepreneurs either. These elements make the India story very compelling for us,” Kodikal said.

Triodos manages roughly $100 million worth of portfolio in India, with 30% of the fund value dedicated toward equity. Its first investment was with Vijay Mahajan of BASIX Group, Kodikal said.

According to Bala Deshpande, senior managing director at New Enterprise Associates (India) Pvt. Ltd, India has been a consistent market even though some sectors faced volatility. NEA set up an India practice in 2009 and has invested $350 million. “Despite the Lehman Brothers crisis, and now the uncertainties related to US President Donald Trump and Brexit, India is well insulated. Between these extremes India remains an attractive investment destination,” she said.

Challenges in India

The positive views notwithstanding, GPs and LPs also shared their negative experiences and warned of a herd mentality.

Bala Naidu, managing partner at Argha Capital LLP, said mounting bad loans in the banking system and the lopsided economic growth numbers are two areas that, if not addressed, will ruin the party.

“I have been involved in investing $1 billion in India and I am not happy with the process. We should not compare India with China, Malaysia, and Vietnam in terms of returns,” Naidu said, adding that there are pockets of excellence in sectors such as financial services, life sciences, technology and consumer goods. “Leaving the four (sectors) aside on a systemic risk basis, all other sectors are probably not worth it.”

The panel discussion also highlighted certain challenges on investing in India. These include lack of exit opportunities, expensive valuations and the need for a greater role by the government in boosting new businesses.

“If we answer the questions surrounding the exits in much comprehensive and conclusive manner, I do think India has a great chance (of being a top investment destination) in the next five years,” said Deshpande of NEA.

Kodikal of Triodos identified corporate governance and high valuations as challenges. “Valuations have always been a big challenge and because of that, one thing we don’t shy away from is walking away if we feel there is a bidding war or if valuations are not aligned with the fundamentals,” Kodikal said.

Naidu of Argha Capital referred to historical data and said most investments do not make money in India. “One odd investment makes you 10% or 20% but the skew is poor,” Naidu said. “If I were an LP, I would not touch this country with a bargepole.”

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