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July 30, 2009

Deal Alert: Online classifieds firm Quikr raises Rs. 20-Cr second round funding

Edited excerpts from the Press Release

Quikr India, the online classifieds site, has raised a Rs. 20 crore second round of funding in led by new investor Omidyar Network and returning investor Matrix Partners India. Omidyar Network is the investment vehicle of Pierre Omidyar, founder of leading US-based online auctions firm eBay.

Quikr is the Indian edition of the free classifieds portal, Kijiji, floated by eBay. Matrix had first invested in the company in February 2008.

Along with the latest investment, Quikr India has also announced the appointment former Booz Allen Hamilton executive Pranay Chulet as its CEO.

July 28, 2009

Halcyon Group launches forum to assist cos. facing difficult times

Investment management firm Halcyon Resources & Management has catalysed the launch of the Halcyon Forum comprising of eminent individuals from banking, manufacturing, capital markets and services sectors, to provide advice to businesses on dealing with the economic downturn.

Members of the Halcyon Forum include M. G. Bhide (former CMD of Bank of India and MD of SBI), Raghunathan Sankaran (Founder and Chairman of IndGlobal Finance), Nabankur Gupta (Chairman of Blue Ocean Capital and board member of Raymond), Urjit R. Patel (an Economist currently with Reliance Industries and formerly a Consultant to the Ministry of Finance) and Narayan K. Seshadri (Chairman & CEO of Halcyon Group).

How the Forum works

Companies that apply to the Forum would provide information on their businesses to enable appropriate diagnostics. The results of the diagnostic along with broad options will be presented to the Promoters/Management who will be invited for interaction with the Forum. If necessary, the Forum will also make recommendations to the lender banks, investors, creditors and other stake holders in respect of their continued participation to enable the business to tide over its difficulties. The Forum will take up only businesses with annual revenues in excess of Rs. 50 crores.

Extracts from a note from Halcyon on the need for such a forum:

The economic slowdown has affected all facets of businesses. Revenues and resultant profits have declined, expenses remain static or have increased, due to interest costs and other factors, liabilities have ballooned whereas asset values have gone down. Also, in many cases new investments have been postponed.

Most business managers have had no experience in dealing with such a confluence of severe adverse changes. We increasingly encounter situations where managers and promoters see it as a temporary financing problem. Consequently only the symptoms are addressed, rather than the root cause. Additionally, due to managers’ inexperience in anticipating, identifying, and dealing with problems, many such businesses are at a high risk of erosion. Needless to say the resulting impact on the Banks’ NPA portfolios and the wider economy could be significant.

For more information about the Forum, email

3-day Certificate Course in Private Equity Management

August 11, 12 & 13, 2009 in Delhi.

The modules of this course have been specifically designed to offer participants an overview and a broad understanding of the different milestones and processes in the investment cycle.

The Foundation Course looks at:

* Academic Tutorials (Fundamentals of VC/PE)
* The due diligence process
* Intellectual property rights
* Legal aspects of private equity and venture capital
* Pricing and structuring of deals
* Creating value and managing growth
* Building Boards
* Valuation of portfolio companies
* Valuation Guidelines & Reporting Guidelines
* Divestments

This program aims to provide participants exposure on governance and reporting guidelines in particular.

At the end of the course, participants earn a Certificate from EVCA jointly signed by IVCA.

For more details, please contact: Dolly Goklaney at

Deal Alert: Anup Shah Law Firm merges with AZB Partners

Bangalore, KA-based Anup S. Shah Law Firm, which has offices in Hyderabad and Chennai also, is to merge with AZB & Partners, Venture Intelligence has learnt. Anup Shah will bring with him two partners and about 15 associates. The total strength of AZB & Partners’ Bangalore office would now be approximately 40 lawyers, including five partners.

July 27, 2009

Trends in Corporate Farming

Businessworld has an article on the progress (or the lack of it) of the agri-initiatives of various corporate houses.

Take Jain Irrigation, which derives Rs 300 crore of its revenues from agri business by aggregating 7,000 acres of farmland to grow white onions and mangoes for Cargill, the global seed company. The fruits and vegetables are processed and shipped to Cargill, which in turn supplies them to retail companies around the world. “We work with 1,500 farmers, and have been working with them from the seed input stage,” says Anil Jain, MD of Jain Irrigation.

Aggregation was easy for the Jains given the proximity of farm lands to processing factories that have a capacity of 20,000 tonne per day. But what makes Jain Irrigation’s model of contract farming different is that there are no formal signed contracts with the farmers. The arrangement is based on the strong relationship built by the company by selling drip irrigation systems to these farmers.

A similar business model is followed by Vista Foods, a food processing company that supplies to McDonald’s. The company works with over 500 farmers in Ooty, Tamil Nadu to source iceberg lettuce. Another little known company Desai Fruit and Vegetable in Gujarat works with over 2,000 farmers aggregating over 5,000 acres of land. Most of the produce it contracts — bananas and mangoes — end up in Europe. The Bharti joint venture with processing firm Delmonte aggregates another 2,000 acres.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

For-profit schools - without the hypocrisy

In an article for the Economic Times, Bureaucrat-turned-Education CEO Amit Kaushik, calls for "bold new steps" that will encourage private investments in schools.
The simplest way to do so would be by allowing private schools to be held under one of two options: schools could either be operated by not-for-profit foundations as is presently the case, with the understanding that such schools would not be allowed to charge high fees and would have to include children from underprivileged backgrounds, or by for-profit commercial entities set up like any other business venture by the corporate sector. The latter entities could be treated at par with other commercial venture, subject to taxes and applicable company laws, but allowed to distribute surpluses to investors as dividends. It is not unreasonable to allow a reasonable return on investment in order to attract that investment in the first place.

Naturally, schools set up by private companies would not be eligible for concessional land or any other indulgence from the government. Such a move would eliminate the need for organisations to bend rules to siphon funds out of not-for-profit entities, introduce transparency into the system and attract substantial investment in school infrastructure and quality improvement.

To ensure that parents are not exploited by private schools charging inordinately high fees, the government could put in place a regulator to guarantee a level-playing field. With the regulator ensuring all schools meet minimum standards or face derecognition and prosecution, fly-by-night operators would be forced to comply or close shop.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

July 24, 2009

Why NREGS is good for the markets

In a column for Business Standard, Akash Prakash of Amansa Capital, feels the rising fiscal deficit - one of the catalysts for which will be more and more schemes that send money to rural areas - will ensure that that government pushes through economic reforms willy nilly.
..the clear takeaway (from the latest election) has been that success in transferring significant resources into rural India has delivered votes. Spend large chunks of money on social schemes targeted at rural India, ensure reasonable delivery of these schemes and you will get votes. Every political party has understood this message, and this trend of increased resource transfer towards the poor through enhanced social security schemes is here to stay. For example, the NREGA outlay has already moved up to Rs 39,000 crore, this will only increase further as the scheme gets extended to urban areas and wages are maintained in real terms. There is now the imminent launch of the Food Security Act, and we will see more such schemes given our poor development indicators.

...The question then comes to how will we fund all these schemes and social expenditure, and this is where the political imperative to ensure high economic growth kicks in. For the simple truth is that unless we get back to an 8 per cent-type GDP growth, we will be unable to simultaneously get the fiscal deficit under control and fund the required social sector outlays. Economic growth is the only tonic which can provide the revenues needed to fund our ever-growing social sector commitments. Politicians, I think, now understand this. They need to transfer large amounts of money in an effective way into rural India to get elected. The only way for that to happen is if the economy is robust and growing strongly. Thus everyone is aligned in ensuring the end outcome of high GDP growth (probably for the first time).

...Most of the reforms investors want to see — be it disinvestment, FDI limit hikes, education reform, tax rationalisation etc — will happen over the coming years. Maybe not in the next six months as investors want, but it will happen. We only reform with our backs to the wall, and the fiscal situation leaves us with little choice. Without serious structural reform we will not get the growth we need to fund our social commitments.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

July 22, 2009

Time to rethink GP compensation?

"Super LP" Chris Douvos has proposed a new fee formula for Private Equity funds.
Currently, LPs worry that the carry system grants GPs a free option in times of frothy markets; LPs ask: why pay an incentive to people who simply capture beta? GPs on the other hand bellyache about how long-dated carry payouts can be; after all, those wacky hedgies get paid every year (watch those high watermarks, boys). But what if we rethought the way in which carry is paid? What if we instead paid people on a deal by deal basis, but only when they beat the opportunity cost of an appropriate public index? And let's acknowledge that the public markets are a fast rabbit, so we should pay people a substantial portion (25%? 50%?) of the excess return above equity-substitute cost of capital. You would have true-ups every couple of years to ensure that groups didn't get paid more than X% of the net profits on the fund.

Something like that could be a win-win: LPs get a formalization of private equity's return enhancing essence while GPs pull carry forward (increasing the PV!) and could even get paid on flat (or down!) investments, as long as they exceeded public market comps.

While we're at it, we could also get everyone on a budgeted fee (now I'm getting Pollyanna -- sorry: I've exceeded my daily Diet Coke allotment). Pay yourselves well, folks; this is America and there's a market for your services, but let's not be bonusing back millions of dollars in excess fees . . . let's focus on cap gains, not W-2 income.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

July 16, 2009

"PE investors rolling up sleeves at portfolio cos."

Business Today has an article on how PE firms are becoming more hands on with their portfolio companies in the face of the economic downturn.
Private equity by nature is—or is at least perceived to be—a pure financial transaction, with the investing firm picking up a stake by putting cash on the table. But it doesn’t have to be that way—not when economic growth is slowing down, demand is softening and earnings are under pressure. That’s when the pedigree and the wealth of experience of the PE player become vital, allowing him to get involved in strategic evaluations at the portfolio company. Decisions involving cost reductions, vendor development, disinvestments and cost-effective sourcing are increasingly being blessed—and in a few cases even dictated—by the PE partners.

In recent quarters, senior team members of PEfunds have been known to park themselves in their investee company offices, run marathon meetings to take stock of the financial position and devise strategies to ease the pain of the economic slowdown. For instance, Nitin Deshmukh, CEO, Kotak Private Equity, had started screening the cash flows of his 15 portfolio companies as early as in April 2008. It wasn’t long before cost control assumed more importance. The first sign of stress became visible when banks refused to disburse sanctioned loans and customers who had paid up 75 per cent of the price of goods booked refused to pick up the inventory. Satish Mandhana, Executive Director, IDFC Private Equity, recounts how foreign banks had withdrawn credit lines to some of their portfolio companies and the immediate challenge for his team was to secure a line of credit from the domestic banks.

...Businesses backed by PE from large conglomerates can gain plenty from the latter’s expertise in a particular sector. V Mart can access apparel from Aditya Birla Group outfit Madura Garments and financial products from its insurance subsidiary, Birla Sun Life Insurance, at competitive rates. Narula of Lilliput learnt a hard lesson in inventory management from Indivision. Its PE managers alerted Narula about an impending slowdown and an inventory pile-up in July 2008.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

The TMB Community Bank Saga Drags On

Forbes India has an article on how the investor group led by former Pepsi India head Ramesh Vangal is the latest one to struggle to gain control of the Tamil Nadu-based community bank TMB.
In TMB’s Tuticorin headquarters sits an equally worried-looking man. Managing Director Nagamal Reddy wants to take a slew of decisions to respond to economic challenges and nudge the business forward. TMB needs to open new branches, finalise a national expansion strategy, quickly hire at least 600 people, issue bonus shares to capitalise its huge reserves, and draw up plans for an initial public offering. He can’t do any of this, because he doesn’t have a board to take these plans to. Well, two nominees of Reserve Bank of India keep him company, but a full-fledged board that has the power to take these decisions has not been allowed to take charge.

At stake is not only TMB’s ownership but the larger question about community banks in India. These banks, which combine traditional forms of relationship-based financing with modern banking, came as a boon to communities discriminated against by untouchability. That was a long time ago; today, community-based banking is becoming impractical. With access to capital and their customer base both limited to niche groups, many have been devoured by larger banks. Some have got nationalised, others sidelined; a few, like TMB, have pressed on, but have found their communities unable to feed their hunger for resources and professional management.

...Community banks in India have been in a state of flux in recent years, having to choose between growth capital and social capital. Catholic Syrian Bank has been serving the eponymous Christian denomination for decades. The Archdiocese of Thrissur still has significant influence over the bank. An attempt to merge it with Federal Bank has sparked off a controversy. City Union Bank was started by Brahmins in Kumbakonam. The community still holds a big stake, but the bank has opened up, recently welcoming Larsen & Toubro as a shareholder. Development Credit Bank was started as a cooperative bank to cater to Bohra Muslims. It became a commercial bank in 1995. The Aga Khan Foundation continues to be the single largest shareholder. The management is professional. Bank of Madura was started by a Chettiyar, and remained closely associated with that community. It got merged into ICICI Bank after community members sold their stake. Vysya Bank (Vysyas) and Dhanalakshmi Bank (Brahmins) are other examples of community banks that went mainstream.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

July 15, 2009

Profile of CX Partners' Ajay Relan

Forbes India has a profile of Ajay Relan, the former India head of Citigroup's PE arm, who is now raising his own fund.
In May 2008, word spread that CVCI India would lose Relan. Thanks to Relan and his team, Jindal Steel had proven a money spinner and so had Suzlon Energy and IVRCL. With such impressive track, it seemed a good idea to launch a new fund. And Relan did just that with CX Partners. Relan was said to have left behind close to $10 million in unrealised compensation. His peers can understand his sense of urgency. “When you are as old as Ajay is, you just want to get working on your next idea quickly. Money left behind is of little value,” says William Comfort, former head of CVCI.

...Within one month of leaving Citi, Relan had secured Morgan Creek Capital which decided to invest $100 million in CX Partners. Relan looked set to tap more investors. “Well, if there is one guy who can go out and raise some serious money then Ajay would have to be it,” Dhawan had said in August. Relan had both the taste and the vintage on offer. He had overseen the investment of more than a billion dollars into India and had investments such as i-flex, IVRCL, Suzlon and Sasken that had made lots of money for CVCI. But still, Relan’s target was ambitious: raising $1.1 billion. “That was the first thing that we changed after October,” says Relan. Once Lehman went bust on September 15, the financial sector imploded. “We knew $1 billion would be impossible so we changed the size to $750 million. We figured that with a 50 percent decline in corporate valuations, the new $750 million would be equivalent to the old $1 billion,” he says.

Even with that target, progress has been slow. Almost a year after he started the fund-raising, Relan has $220 million in capital commitments from seven financial institutions but his first close at $350 million is still a month away.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

World Economy to US Consumer: Start spending again. NOW!

Morgan Stanley's Ruchir Sharma writes in the Economic Times how it is crucial for the global economy - and stock markets - that the US consumer begins to spend again.
Unfortunately, the news on the consumption front has been discouraging of late. It appears that the US consumer has used all the additional income from the stimulus packages to just rebuild the savings pool. The household savings ratio has risen from virtually zero in late 2007 to 6% currently. That’s a huge swing in a short span of time although it is still below the historical norm of 8%. No meaningful global economic recovery can shape up as long as the US consumer stays completely focused on increasing the savings ratio. After all, consumption drives growth, not manufacturing activity as the latter is undertaken only in anticipation of final demand.

The most important data then to track in the weeks and months ahead are US retail sales numbers. While the US consumer is unlikely to return to the spendthrift ways of the past two decades for a long time to come, a modest increase in retail sales is now required to create some sort of a virtuous economic cycle. Over time, the US consumer needs to work off the excessive leverage and gradually increase the savings rate while the rest of the world makes the necessary structural adjustments to the growth model. In the long-run, final demand trends of the developed world will play a less significant role and the growth leadership has to be provided by the emerging market consumer. But decoupling is an incremental process and given the trade and capital flow linkages, developing countries cannot pull away from the developed world too far, too quickly.

...It’s then all down to the US consumer to determine whether a global economic recovery gains traction by moving beyond the inventory rebuilding stage. If the US consumer remains in a funk and keeps on saving any additional income the world economy will at best follow an L-shaped economic path, implying that the cyclical bull market in equities is over. But even a modest revival in US consumer activity will be enough to create a positive feedback loop between production and consumption and extend the cyclical bull market in stocks till at least early 2010 when fresh challenges will emerge as the stimulus effects fade and excessive leverage in the system remains a drag.

The bears argue that the consumer will keep on retrenching this year as the economic wounds of the past year are still raw and the debt overload high. They do have history on their side: it has typically taken around three years for the US economy to find its footing after suffering a major crisis. The first phase of the Great Depression lasted three years from 1929 to 1932. In a disturbing parallel, the stock market rallied by 30% in early 1931 as industrial activity seemed to be stabilising following a market crash of nearly 50% in the previous year. But the consumer deleveraging process continued unabated that subsequently took the economy and the markets for a deeper dive. Even during a mild recession in 2001 following the tech boom-bust cycle, it took till mid-2003 for consumer spending to accelerate despite industrial activity having bottomed in late 2001 and showing a rebound in early 2002.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

July 13, 2009

PE/VC firms bullish on Healthcare investments: Report

A new report released by research firm Venture Intelligence reveals PE investors are likely to focus specifically on segments like Diagnostic Services, Medical Devices, Hospital Chains and Wellness Products.

Private Equity and Venture Capital investors, who have invested over $2 billion into Healthcare & Life Sciences (HLS) companies in India over the last five years, are keen to step up the pace of investments in this industry, a newly released report by research firm Venture Intelligence indicates. A survey of over 60 PE & VC firms in the report titled “Private Equity Pulse on Healthcare & Life Sciences” shows that the investors are especially keen to tap into sectors like Diagnostic Services, Medical Devices / Equipment, Hospital Chains and Wellness Products and Services.

“Given the fragmented nature of both the hospitals and pharmaceuticals sectors, investors also see potential for tapping into consolidation opportunities in partnership with growth-oriented entrepreneurs,” points out Mr. Arun Natarajan, CEO of Venture Intelligence.

The report features articles by leading PE/VC investors (like Baring Private Equity India, India Value Fund and IDG Ventures India) as well as advisory firms (like The Parthenon Group, Ernst & Young, KPMG and PwC).

In the context of rising interest among PE firms to invest in the hospitals segment, The Parthenon Group provides a special perspective on how investors can pick the right firms to back in a sector characterized by wide variation in financial performance.

The KPMG article, providing an overview of the healthcare segment, points out how the sheer levels of under-penetration of healthcare services - in addition to factors such as a growing population, increasing disease profiles etc. – is one of the key growth drivers for the sector. Given the globalized nature of the sector, the fortunes of Indian pharmaceuticals firms are closely linked to trends in developed markets including those of the so-called “Big Pharma” firms. In a special article, an expert from PwC visualizes the global pharma landscape ten years ahead.

The article by India Value Fund delves into the nuances that make consolidating hospital chains - especially in Tier II and Tier III cities - an attractive opportunity for PE investors. Ernst & Young details how hospital chains can work towards replicating pockets of excellence across all owned and operated hospitals consistently and uniformly.

Baring Private Equity Partners India provides an interesting perspective on understanding innovation in the Indian context. An article from IDG Ventures India highlights the various opportunities that young companies can tap into by creating products and services to suit the unique needs of the Indian market.

Despite the overall optimism, the investor poll featured in the report indicates that PE/VC firms have a set of specific concerns relating to the HLS industry. Long gestation periods, scalability and talent shortage are among the top concerns for investors when it comes to the healthcare sector. In the Life Sciences segment, investors’ concerns are focused on the high risk of failure (especially in new drug R&D), stiff competition from inside and outside India, as well as patent-related issues. The “Entrepreneur’s Perspective” section of the report features how entrepreneurs – from companies which have already partnered with PE/VC investors like Avesthagen, Evolva Biotech, Metropolis Health Services, Ocimum Biosolutions and Sai Advantium - are addressing these concerns.

For the convenience of entrepreneurs, the report provides a listing of Private Equity and Venture Capital funds keen to invest in this industry. A directory of investment advisory firms, who provide value-added intermediation services with a special focus on HLS, is also included.

The report can be downloaded from

July 12, 2009

Interview with Suresh Soni of GTI Group

Venture Intelligence recently spoke to Suresh Soni of GTI Group, an US-headquartered Private Equity firm. GTI plans to invest about $100 million in India over 3-5 years. The full version of the interview appears in our latest quarterly PE report.

Venture Intelligence: We understand that the GTI Group straddles both the VC and PE segments. Tell us more about the firm and how it is structured.

Suresh Soni:
GTI Group was started by our chairman Dr. Michael Shculhof after having spent 26 years with Sony. During the last three years he was the CEO of Sony-North America. He brought Sony into the music and movie business and is the first non-Japanese to be on the board of Sony. We’ve done about 25 transactions over the past 8-9 years. All of us have operating backgrounds – not only the partners but almost everyone who works here. We now have morphed into building platforms for creating billion-dollar companies. We want to create large companies both through organic growth and acquisitions.

VI: So, are you structured as a regular PE/VC fund with external capital?

No it’s a proprietary fund. In addition, we syndicate deals based on what is required for each opportunity. So far, we have syndicated over $250 million dollars over the last 7-8 years.

VI: Tell us more about the GTI Group’s plans for India?

We are interested in three areas - Aerospace and Aviation, Healthcare and Media.

On the aviation and aerospace side, we have made an investment in Air Works, which is India’s largest MRO business. Punj Lloyd and GTI invested about $10 million each in the company. We are in the process of starting a charter airline business called Imperial Jets, as a JV with Punj Loyd and a Lebanese company. We are also looking to set up an aircraft component manufacturing business.

In the healthcare segment, we have actually made a venture investment in a new business model, where we are creating day-care surgery centers. The first one just started in Bangalore and we hope to roll out another 25 centers in the next 6-12 months across five cities. The total investment in this project could be about $40-50 million in the next 3 years. We are also evaluating complementary investments in this space.

VI: Do you plan to raise an India-dedicated fund?

We are planning to raise an India dedicated fund next year after we have a partner on the ground full time. We plan to set up our first office in Bangalore soon.

Interview with Rajesh Srivathsa of Ojas Ventures

N. Sriram of Venture Intelligence recently spoke with Rajesh Srivathsa, Managing Partner of Ojas Ventures, the tech-focused seed fund spun off from Nadathur Holdings & Investments, the family office of Infosys co-founder N.S. Raghavan.

Venture Intelligence: What are Ojas’ criteria for investing in a company?

Rajesh Srivathsa:
Ours is a technology focused seed fund. We have two criteria for investing. First, we look for companies that are predominantly in India. While we make some exceptions, we prefer that both the management team as well as the company is in India.

Secondly, we expect the company to have a technology product or solution. We do not normally invest in services companies. We look at consumer services companies as long as they have a technology platform which offers a significant differentiation from the competition.

So the underlying theme is that the company has a differentiated technology solution or uses technology to offer a consumer services solution.

VI: Within technology, mobile seems your preferred area. Why?

If we look at the traditional happy hunting grounds for VCs the world over, it encompasses technology companies across communications, CAD, silicon, embedded, networking, enterprise software, consumer Internet, consumer mobile and now, clean and green..

When we started two years ago, in India, most of the seed stage companies that were innovating were in the mobile domain. That was the reason we happened to invest in mobile companies. Even in our investments within the mobile domain, there is a significant range. We have invested in Mango Technologies, a hardcore mobile company, where the end customer is a mobile OEM/ODM. Then there is Ziva which is a consumer services company offering search solutions, using mobile as a platform for delivery. Tyfone could be classified as both a mobile company as well as a financial services firm providing payment and banking solutions. Telibrahma creates a mobile channel that is complementary to the the operator network. So except Mango, all the other companies have intersections with other areas. Telibrahma is a mobile-media company. Tyfone is a mobile-banking and payments company and so on.

VI: Will the focus on mobile continue?

No. From a fund perspective we are already overinvested in the mobile sector. Unless we see a company that offers a significantly differentiated offering, we will not consider mobile now. Our last two investments – Cocubes and Arigami - are not in the mobile area.

VI: When the technology is complex, like in case of Mango Technologies, how do you make your investment decisions?

We are comfortable in investing in companies where we can understand the technology behind the company. For example, while we are keen on clean energy, we have not made any investments yet because we don’t yet have the expertise but are continuing to build up our expertise in this area.

In our opinion, the only way to do due diligence is by talking to the customers and ecosystem partners; and we spend considerable time on this before investing. For example, before investing in Mango, I went to China and South Korea and spoke to OEM/ODM players there. Before we invested in Tyfone, we spent a lot of time talking to banks and operators. Without talking to customers, we cannot make qualified investments.

The unfortunate consequence of this is that when we make a hardcore technology investment, it may take a couple of weeks longer than if it were a relatively simple consumer services company. It also works the other way round. Since we already have made contacts with the customers and potential ecosystem partners, if we do make an investment, we send note saying ‘Thanks for your time. We have made an investment. Let’s know if this company can help you’. So it acts as a door opener as well for the startup company.

VI: Talking about your investment in Arigami, how do you look at semiconductors as a potential area of investment?

We are surely looking at the semi-conductor ecosystem. We are one of the early VC members of Indian Semiconductor Association. But typically semi-conductor companies take in a lot of money before they can see the light of the day. We are a small fund. Given our fund size, we are constrained only to invest in those companies which are more towards the embedded CAD or IP side. We cannot invest in a company that is directly building a complex chip since they will run out of the limited money we can provide before reaching a validation stage. We look to invest only in those companies that can get to positive cash flow with reasonable revenues. This will prove as a reasonable validation for other larger VCs to become interested and potentially provide scale stage if required.

In Arigami, our investment was driven by the fact that it was a fundamental technology play. They are using concepts from Vedic and Indian Maths to see how power consumption can be reduced significantly. They have already filed four patents and have demonstrated considerable power consumption reduction in VHDL simulations. We are funding them to validate it now on a real chipset. Even if you get a 10%-15% reduction, you are doing a tremendous job.

VI: What was the driver for your investment in Cocubes (an online platform that enables colleges to manage their campus placements)?

At the end of the day, we need technology only for three reasons: 1. Can you provide a differentiated value proposition to the customer as compared to the the competition? 2. Can you provide a better, faster, cheaper solution while having higher profit margins? and 3. Can you scale nonlinearly (i.e., scale without having to hire more bodies)?

Cocubes is a services company that leverages a technology platform that it has architected to address all three of the above points – and thus, hopefully, help it grow to be a scalable, profitable, high margin business.

VI: What was the rationale for investing in Telibrahma which had already received a round of VC investments before you got in?

We do not necessarily need to be the first investor. In cases like Telibrahma, where a round of funding has already happened, we would still be interested if we find the technology compelling. We did significant amount of due diligence and found that there are only two other companies in the world that are close to Telibrahma in technology – one is in the UK and the other in the US.

VI: Which sectors are you actively looking at and conversely, which sectors will you not invest in?

Firstly, we ask: Is there a real differentiator in this company which has a basis in IP or technology? We then don’t care what sector it is. Secondly, we need to be comfortable with that sector. If it is an area where we have no understanding, then we will not invest. This is important because we are investing in seed level companies where we expect to get involved with the company in a significant manner. Otherwise, there isn’t much value add that we provide to the startup; and we are not protecting our investment either. We will ask ourselves if we are comfortable with the market and post-due diligence, if we can continue to be plugged into the ecosystem. If the answer is ‘no’, then we would not invest. If it is completely a non-technology play or an IT Services firm, then there is less likelihood of our investing in it.

VI: What do think of the current deal flow environment?

We have not seen any change. India has been affected in the downturn no doubt, but I do not think at the seed level people have been affected. On the whole, we have not seen any decrease in deal flow.

VI: For your portfolio companies, has it become tougher to raise the second round of funding?

If our companies can get to a point where they can get reasonable revenues and become cash flow positive, then they will not face difficulties in second round fund raising. Also, if we find that in the current environment, a company that we have backed doesn’t enthuse VCs, then we look to customers and ecosystem partners directly for Series B funding. This is what we done in one of our portfolio companies and have found a tremendous response from partners and customers.

VI: How does having a single investor (Limited Partner or LP) behind the firm affect your outlook compared to regular VC firms?

There is no difference in terms of return expectations. However, a single LP certainly makes it easier in getting approvals if there is a change in direction - on issues such as exceeding ceiling norms for investments in one company in the portfolio, or number of companies in which we are totally invested, etc. At the same time, having multiple-LPs will help us with a broader network. Our next fund will be a multi-LP fund.

July 06, 2009

Can Indian business houses succeed at managing PE funds?

Shailendra Bhandari, who has just quit as head of Tata Capital's Private Equity business, recently wrote an article in the Economic Times on the opportunities and challenges for Indian business groups launching private equity funds.
So where would the differentiation come from? The answer to this, perhaps, lies in four strengths enjoyed to various degrees by most conglomerates: Track-record, Networks, Knowledge, and Brand.

Track-record: Successful conglomerates know how to create value. For example, a third of both the sensex and Nifty are made up by companies belonging to conglomerates. Not only have these companies rewarded their shareholders over time, they have proved to be tremendous wealth creators for their promoters. Tata Consultancy Services is a case in point. With a share capital (promoter’s equity) at IPO of about Rs 36 crore, the company today has a market capitalisation of over Rs 64,573 crore. Last year, a partial dilution of promoter holding at Tata Tele Services Ltd saw NTT DoCoMo value the company at over $10 billion, creating tremendous value to its promoters.

...However, the biggest challenge for any conglomerate in PE relates to “conflicts of interests”. A typical question from a potential investor might be “How can I gain comfort that you will act in my best interest, rather than that of your group?” Unlike stand-alone private equity fund managers, conglomerates promote other businesses and can have competing interests to that of portfolio companies.

...The desire to maximise the leverage of the conglomerate group needs to be balanced against the need to be independent of this same group. This works best where individual companies within the group already operate with a high degree of independence from the ultimate promoter. Having a professional team with credibility in the market to foster the operations could well be a starting point; having a separate corporate vehicle for fund management would be another. This would require a deep commitment to and an appreciation of the long-term potential of the business to produce material returns. In essence, the group has to believe that the business of private equity is an important franchise which the group wishes to develop.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

Deal Alert: Inventus Capital invests in online bus ticketing service redBus

Edited extract from press release:

Inventus Capital Partners has announced that it led the second round investment in Pilani Soft Labs Private Limited, the company behind India’s leading bus ticketing service, redBus ( Parag Dhol from Inventus Advisory Services will join redBus’ board.

The round also received participation from first round investor Seedfund.

redBus, which offers consumers the convenience of booking bus tickets via the phone, net and through its partners, will use the latest round of financing to further increase its geographical footprint across India.

Kanwal Rekhi, co-founder, Inventus Capital Partners, said, “The fragmented bus travel market in India offers a significant aggregation opportunity. In redBus we see a set of young, enthusiastic entrepreneurs addressing a large and largely untapped opportunity. We hope to work closely with the founders, existing investor and advisors to create a unique and valuable brand”.

About Inventus Capital Partners:

Inventus supports ambitious entrepreneurs building the next generation of technology powered companies, particularly software products, services, embedded software, consumer internet, semiconductor and mobile services companies. The Inventus principals have previously successfully invested in over 90 companies through multiple venture cycles since 1993. They play active mentoring roles on company boards. To date they’ve supported entrepreneurs in building dozens of successful public companies or highly valued acquisitions, resulting in the creation of $30 billion+ in aggregate wealth and market value for respective entrepreneur founders and shareholders. For more information on Inventus Capital Partners, please visit:

July 03, 2009

"Currency movements to dictate endgame of global market turmoil"

Manish Chokhani of Enam Securities says in an interview to CNBC-TV 18 that China's actions on its currency will dictate the end game of the current global stock market turmoil. is Japan, China and the oil countries which fund the US. The US currency is not something that someone is wanting to accept longer-term. At the same time while the oil producing countries can adjust their oil prices up and thereby get away with things, Japan doesn’t have that choice, so be it. Therefore the fulcrum of this trade is going to be what the Chinese do. And China to my mind has no business longer-term not allowing its currency to float because you are running the largest hire purchase scheme in the world, you are lending to someone in a currency in which is going to be worthless by the time you get eventually repaid. And you become fairly rich as an economy, you don’t need to be that dependent on exports and you want your population to start consuming more..and you have built up a fairly good infrastructure. So I would not be very surprised if the mechanism through which this whole thing plays out is an eventual float of the Chinese currency and that then becomes also a reserved currency in the world of some manner and the world fragments then between the Dollar, Euro, Yen and Yuan. That causes a gush into markets of the emerging markets nature but led by China. do all these losses in the US get transmitted out, if the dollar doesn’t fall, you are transmitting it out to the savers who are holding the bonds and 50% of US bonds are held by foreigners including the Japanese and the Chinese and the Middle East countries. No one is so foolish to realize longer term this is a game which has to end and you cannot be printing USD 1-2 trillion of fresh currency every year without spooking someone.

..(this might make the Chinese think one day) we don’t need to continue exporting. In any case the trade balance with the US is shrinking because they are importing less. So we are not gaining by this hire purchase scheme anymore and all the IOUs which we are sitting on are actually getting worthless by the day. It maybe in our best interest because we have a current account surplus, we have a budget surplus, the currency is fairly stable and if we float it, it may just accelerate our growth in the world. So my bet is that that is how things will play out longer-term...Directionally that is where the market is heading.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at

Shariah Compliance for PE Funds

Here is a note on the above topic prepared by our knowledge partners

There has been a growing demand from investors domiciled in the Gulf Co-operative Council region for investment portfolios to include Shariah compliant instruments. With growing credit crunch, LP defaults in other jurisdictions and other factors that have emerged from the global financial turmoil, the fund managers are evaluating options to tap investors in Gulf, which amongst other things require the fund to comply with the tenets of Islamic laws. This note briefly identifies some basic considerations whilst establishing a Shariah compliant fund.

Many Muslim investors conduct their commercial activities in accordance with an Islamic body of law called Shariah. Shariah, or literally “the way”, is based on the Quran (the religious text in Islam), Hadith (the sayings and actions of Prophet Mohammed), Isma (the consensus of Shariah scholars), Qiyas (reasoning by anology) and centuries of interpretation and precedents. Shariah law does not have uniform set of standards and interpretations. While some institutions, such as the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institution, work to unify the various interpretations and opinions of scholars, but they are only recommendatory in nature. Whether an investor views a particular private equity fund and its investments as “Shariah-compliant” will depend upon the review and approval by a Shariah consultant or supervisory board engaged by the fund manager and/or the investors' own consultant or supervisory board.

Investment Restrictions
In order to qualify as Shariah-compliant fund, a fund’s investment policy must contain restrictions that prohibit investment in industries considered haraam.

These restrictions usually prohibit investments in companies involved in the following industries and activities:

• Conventional financial services (including conventional banks and insurance companies);

• Gambling and casinos;

• Alcohol and pork products;

• Certain entertainment, such as gossip columns or pornography (but often including cinemas, music and publications);

• Weapons or military equipments; and

• Any other immoral or unethical activities identified by Shariah consultant or supervisory board.

What are considerations for fund managers?

An investment fund may be structured based on the Mudaraba contract under which an investor provides capital to another person/body (a fund manager), who uses their expertise to devise a suitable investment strategy. Any profits generated by the joint enterprise are divided between the manager and the investor in accordance with a predetermined formula. The financial losses are borne by the investor to a maximum of his capital investment. As indicated above, although there are several restrictions on investments that could be made by the fund, over a period of time there have been certain favorable interpretations by Shariah scholars which permit structuring of the investments and be within the four corners of the permitted activities. Some of the possible avenues include:

• Shariah prohibits usury, which may be defined as exploitation by the owner of a product which another requires. The payment of receipt of interest is usury and therefore investment in entities involved in lending (or borrowing) are prohibited. This restricts ability for most companies to have interest-based debt finance and invest surplus cash in interest bearing bank accounts and other investments. However, some Islamic jurisprudence accepts a debt to equity ratio of 1:3.

• Similarly, there is a school of thought that investors are not partners in a fund but are merely investors. Since no one investor has the power to veto, it would be wrong to ascribe responsibility to an individual for a particular transaction. This may allow some headroom to invest in entities which have merely incidental non-halal features, since investors will not be deemed under Shariah to have authorized the investment. In some instances any company engaged predominantly in halal business, but earns interest on account, an equivalent portion of any dividend paid to a Shariah compliant fund must be given to charity, be it at the fund or the investor level.

• An Ijara fund is usually established for the purpose of purchasing assets (property, machinery, etc) and then leasing those assets to third parties in return for rental income. This may be relevant for real estate funds. Legal ownership of assets remains with the fund as does responsibilities for the management of such asset. A management fee will normally be paid to the manager. It is important that the assets that are leased out must be used in a halal manner and the leasing arrangement is compliant of Shariah.

It is evident from above that there are number of interpretations whilst ensuring whether a particular activity or investment by the fund would be Shariah compliant. Therefore, funds appoint a Shariah consultant or supervisory board that reviews proposed investments and operations and issues opinions as to their compliance with Shariah. There are also certain service providers with their own Shariah boards, which may be engaged on a contractual basis to advice a fund.

Some investors may insist on establishment of Shariah Committee in relation to the fund, which would consist of Islamic scholars and which would advice the General Partners in relation to Shariah compliance. Compliance will be an ongoing obligation and the Shariah committee will be responsible for conducting annual audits to ensure that the fund and portfolio companies continue to operate in accordance with Shariah. One other option that is looked at is that a Shariah compliant parallel vehicle could be established with the main fund.

It is important whilst structuring the fund and preparing investments strategies, private placement memorandum and other fund documents that above restrictions are appropriately addressed for the fund to be able to attract investors for a Shariah compliant fund. With demand for providing opportunities to Gulf investors, the Shariah-compliant funds are growing in numbers and present opportunities to General Partners to tap wider investor base.

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Please Note: This note is only informative and is prepared based on our past experience and publicly available information. The contents of this document are intended for informational purposes only and are not in the nature of a legal opinion or advice. They may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek legal counsel prior to acting upon any of the information provided herein. This note is the exclusive copyright of ARA LAW, Advocates & Solicitors and should not be circulated, reproduced or otherwise used by the intended recipient without the prior permission of ARA LAW.

July 01, 2009

Deal Alert: GVFL invests Rs. 5-Cr in chemicals maker Sebacic India

Edited extracts from the Press Release:

VC firm GVFL has acquired a 24.5% stake in return for a Rs. 5 crore investment in chemicals manufacturing firm Sebacic India. The investment was made from GVFL's Rs. 500 crore SME Technology Venture Fund.

Gujarat-based Sebacic India's proposed plant in Vadodara will have the an installed capacity of 10000 MTPA of Sebacic Acid, the largest in India. The main product, Sebacic Acid, is a derivative of castor oil and is used as a raw material for Bio degradable plastics, aviation lubricants, wind shield materials, etc.

Though China is the largest producer of Sebacic acid with 90% market share, the global production base is shifting towards India because India has competitive advantage over China due to lower castor oil prices in the country and other taxation-related reasons.