New Silk Route, which still has to invest 40 per cent of its $1.4-billion Asia dedicated fund, is looking to put $50-75 million into seven companies. The idea is fewer but larger deals, though there is no change in investment strategy. Its founder, General Partner and CEO, Parag Saxena, tells Shilpy Sinha and Sidhartha that the controversy around company Chairman Rajat Gupta is not going to hamper its plans. Edited excerpts:
Does the latest setback in Europe affect your strategy?
This is not positive and it will get worse, as we have a series of potential problems. The worry about European economies will keep investors from investing money differently than they would with a free mind.
To me, uncertain times are times to make investments. Uncertainty, if it leads to poor prices, is an attractive time for investors. Someone once said that financial assets are the only assets we don’t buy when they go on sale. I view downturns as big attractions.
But with valuations going up in India, are you going to slow down your pace of investment?
Except for a three-month period, valuations in India have never been cheap. Businesses we favour are solid, running ones and we look at how well they can grow. That restricts the companies you invest in. We are not averse to investing in companies where we are already present. We would like to invest in sectors we understand. We are not in a hurry. Wherever we have departed from these principles, we have been slapped right on our face. We will not slow down, but will be selective.
Does a company like Firstsource fit into your scheme of things?
We are more oriented towards domestic businesses and we do have people who understand software. We know the end-customers.
Which sectors would you be looking at?
India is a market where anything executed well is likely to do well in the next 20 years. If I was 20 years of age, I would be moving towards the northeast, as there is so much opportunity there. Then, look at Bihar; it is growing very fast. If you look at south and west, a lot has already happened and so, it is more competitive. We have told our limited partners (LPs) there are five areas of interest: Telecom, financial services, consumer services, infrastructure and manufacturing. In India, our edge would be in data, services related to data, infrastructure and a variety of sectors from traditional power to renewal power.
How much of your investment will be follow-on?
Around 10 per cent of the funds will be in companies we have already invested in. Optimally, we will look at $50-75 million invested in 20-25 transactions. We have 13 transactions today. We would look at seven to 10 more investments. The way things are moving, we would like to have fewer larger investments rather than many small investments.
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Does more large transactions mean more controlled ones?
We are happy to do both. This week, we had talks with two companies and both happen to be small, controlled transactions in the same business, where the idea is to combine these businesses and give them some common resources that are valuable to both. We will acquire 51 per cent or 100 per cent but because we are providing a backbone that we think will add value, we think it is important for us to have control.
There are three investments where we are the only investors. One is by choice and two by the unkind act of God. We are the sole investor willing to put in money in INX. In AIPL, we own 100 per cent stake. We have a lot of interest in people wanting to invest in that company. We are going to give up some equity in the company to raise new capital but we will continue to be the majority shareholder. In Destimoney, we will add some capital.
What would be your preferred route of exit?
Exit in India is something you really have to think about. Just because a company goes public does not mean you have to exit. Whenever there is a strategic exit likely, you need to think about it and cultivate it. For us, with every company, if our percentage ownership is substantial, we will always be thinking about how realistic it is and who would be the likely buyers. It will be a company-specific strategy.
Have LPs changed their expectations over the past few years?
People are actually able to look at our companies and appreciate that these are growing. Our earlier companies have doubled their revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation). If our companies grow at a materially higher rate than the economy, it will be a part of good business.
Then we have to convince our LPs that we bought them at good rates. Then the question is on the valuation at which we entered. We can only show this by bringing other investors. Over the next 24 months, it will be a part of what we do.
What would be your next fund size?
It should be of a comparable size. The environment for raising funds is much tougher today. But, the interest level is high and we have a team that has proven itself. Somewhere around $1.5 billion would make sense for us.
Will the controversy surrounding Rajat Gupta affect your fund-raising plans?
We are not going to raise money for two years, by which time we expect Rajat will be completely cleared of any clouds around this. We believe firmly that Rajat has not broken any rule or law. We have been pro-active and gone ourselves and informed them. The day this news appeared, by the end of the day we had communicated it to all our large LPs. We had follow-on sessions.