Sunil Gottipati is a Principal with Princeton University Investment Company (Princo), the agency responsible for the management of Princeton University’s over $14 billion endowment. Venture Intelligence recently spoke to Gottipati who is active in managing the endowment’s allocations to Private Equity, including in emerging markets like India and China.
This interview first appeared in the latest issue of the Venture Intelligence India Private Equity Roundup Quarterly Report.
Venture Intelligence: Can you give us an overview of Princo’s investments in Indian Private Equity/Venture Capital funds?
Sunil Gottipati: It is important to highlight that the investment approach at Princo is predominantly bottom-up. While we have articulated a goal of increasing the percentage of the endowment that is invested in markets outside the US, implementation of this goal is dependent on us finding high-quality “foreign local” managers based outside the US, a task that is often challenging. We maintain close contact with each of our external managers and indeed, we have articulated a goal of being the best client that each of our managers has. To achieve this goal, we need to maintain a concentrated roster of relationships, so we tend to be extremely selective in adding new managers.
Historically, returns of the best managers have significantly exceeded those of the industry averages. Accordingly, we have always sought to concentrate the portfolio’s exposure with a select group of top-tier managers. Our goal in India, as elsewhere, has been to identify and partner with such managers. Our first investment in an India-dedicated fund was in 2004. We have invested with a handful of managers in the public equity, venture capital, and real estate asset classes that are based on the ground in India. In addition, we have global managers who invest in India. We have not invested with a buyout manager yet in India, but that is more a factor of us not finding the right manager to invest with.
VI: What would be your typical commitment per fund?
SG: We don't necessarily have a target commitment range in mind. What we can hope to earn on an investment is more important than what we can deploy. We would like the returns from each investment to be meaningful for the endowment, we would like to be important investor for the manager, and we would also want to maintain a concentrated roster of relationships. Therefore, when we do invest in a fund, we tend to be among the larger investors. We also do not want to be too big an investor in a fund, so typically we stay below a third of the fund.
VI: How do returns from Indian PE/VC funds compare to those in other markets?
SG: Returns from early stage Venture Capital in India have not been adequately high thus far compared to our experience in other markets. It might be because the end-markets in India for these startups are not large enough and the supporting infrastructure such as payment systems, telecom, and internet penetration are not developed enough to support early-stage venture capital investments. There are early signs that this could change going forward, so we are more hopeful about the next several years compared to the past 5-6 years.
VI: As an LP institution that invests in both countries, why do think we see so many IPOs by Chinese VC-backed companies (including in the US) compared to India?
SG: That is only to be expected, since the Chinese economy is more than twice as big as India's, and perhaps as a result the Chinese startups tend to achieve scale much faster. Telecom and Internet penetration is much greater in China compared to India. The recent IPO of MakeMyTrip.com is probably a good start, and I suspect there will be many more IPOs from Indian venture-backed companies over the next several years.
VI: What is your view of corporate houses floating PE funds?
SG: We do not invest with corporate-backed funds, as there is substantial scope for conflicts of interest. Invariably, the corporate houses tout the benefits from scale and network, but these advantages, if any, are almost always dwarfed by the negatives. We only partner with firms that are employee-owned and where the fund economics (i.e., carried interest and management fees) flow solely to the employees.
VI: Would you invest in first-time private equity/venture capital funds?
SG: Yes, very often, and that is a significant piece of our activity. We are often approached by exceptionally talented individuals, who may or may not have previous investing track record, but often with a strong operating background. We often work with such first time managers to help them think through structuring the fund and make introductions to likeminded LPs.
VI: Would you re-invest into the second funds by VC firms that have not yet started to show any exits?
SG: We don't necessarily focus on exits as a metric of performance, but we try to understand how the portfolio companies are growing. We want to assess the probability for at least some of the companies to grow into large successful businesses over time, although admittedly this is not an easy task. Often the best businesses take time to mature, so you do not want your managers to force an exit before the time is right.
VI: Do you invest in Distressed Debt and Real Estate?
SG: We do. It is particularly hard to find high-quality Real Estate managers in the emerging markets, and India is no exception. Of particular concern for us is the pervasive emphasis on the short term, a disregard for downside scenarios, and the heightened scope for unethical/illegal business practices.
VI: What would be the top one or two items in your due diligence process?
SG: Out of the many things, one thing I would really focus on is the integrity of the manager, especially in emerging markets. We make a lot of reference calls and talk to a lot of people. We spend a lot of time understanding the motivations and the backgrounds of the managers. We focus relatively less on headline performance metrics, but we try to understand the investment and management processes of the managers. In emerging markets, we also look for managers that are flexible and can adapt to fast-evolving market conditions.
VI: What are the key challenges before Indian PE managers?
SG: For the venture capital managers, a key challenge seems to be that the market size and infrastructure bottlenecks seem to limit the rate at which their portfolio companies can scale. For late stage investors, valuations often seem elevated, especially as even small private companies seem to be capable of accessing the public markets, and hence at times the public markets seem to offer better bargains than the private markets.