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India-focused fund ventures into the neighbourhood

India-focused fund ventures into the neighbourhood
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First Published: Sat, Feb 13 2010. 05 49 AM IST
Updated: Fri, Feb 19 2010. 05 47 PM IST
Bangalore: Pakistan’s largest private school chain, Beaconhouse School System, and India-focused fund firm New Silk Route Partners (NSR) have a unique relationship. The Lahore school, run by the Kasuri family, one of the oldest political families in Pakistan, raised money from NSR a couple of years ago and in turn gave the PE firm its first taste of investing in India’s troubled neighbourhood.
NSR now wants to invest one-third of its $1.4 billion (Rs6,510 crore) corpus in firms in Pakistan, Sri Lanka and Bangladesh—the fear of risks bowing to the draw of higher returns. And with Sri Lanka more stable after ending decades of internal strife with the Tamil Tiger rebels, NSR is already evaluating potential deals with mobile phone companies and banks in the island nation.
The Beaconhouse deal, in a way, set a trend for India-centric funds to look at the country’s neighbours and other developing nations in Asia for high-return deals.
“Pakistan has the same dynamics as India, though it lags behind by 10-15 years. People are as aspirational there as here,” said Jacob Kurian, partner, NSR. “While political risk is high, opportunities are also high.”
A post-war Sri Lanka offers a similar advantage, especially as “investment competition is much lesser there than (in) India”, Kurian said.
Mumbai-based Reliance Technology Ventures Ltd too is looking at investment opportunities outside India, but further away—in Israel, Thailand, Singapore and Taiwan. It will likely begin with Thailand, where it has identified agri-related businesses and sectors such as education, tourism, health care, and gems and jewellery as ripe for investment, said chief executive Harshal Shah, who met the nation’s top political leaders last week.
“Our philosophy is that tech and good business models are geography agnostic,” he said. “We are getting interesting deals in these regions and are discussing them.”
Bangalore-based Zephyr Peacock India, the India-centric arm of the New York fund, Zephyr Management Lp, is now interested in Vietnam.
“It reminds us of India of 10 years ago. It’s transitioning from a socialist to a capitalist economy,” said Mukul Gulati, managing director, Zephyr Peacock. “A lot of production is shifting from China to Vietnam. We are closely studying the market.”
Country risk
While Vietnam and Taiwan have had troubled histories and are relatively more stable now, India’s nearest neighbours as well as countries such as Israel are still conflict-borne.
PE firms assess political and financial histories of countries before investing in those nations or outlining the expected returns.
Internal rates of return from Indian companies for PE firms is typically 20-30%, but in nations such as Pakistan and Sri Lanka the expected returns are 2-5% higher, say PE firms.
Sri Lanka ended a near three-decade war with the Liberation Tigers of Tamil Eelam last May, but is on shaky ground again after the arrest of defeated presidential candidate general Sarath Fonseka.
Pakistan had sought financial help from the International Monetary Fund in 2008 to avoid payment defaults and rescue it from an economic crisis.
It also has a history of wars both internally and with India and is engaged in a serious battle with hardliners within the country and on its borders with Afghanistan.
Though the education sector is regarded as immune to political swings, militant Taliban groups have targeted traditional schools in Pakistan known as madrassas and have issued warnings against western education.
Investor worries
Those warnings gave some anxious moments to NSR when its limited partners—Lps, key investors in any PE fund—got worried, even if the Beaconhouse schools weren’t targeted.
Lps seem to have got over the initial worries about investing in such countries as long as the deals are in line with the PE firm’s overall fund strategy.
“We say explore and understand the market before you take the leap. It is not a very wise move otherwise,” Anubha Shrivastava, managing director (Asia) of CDC Group Plc., the UK government-owned fund-of-funds investing in emerging market fund managers, said over the phone from her office in London. CDC Group is an investor in NSR.
NSR engaged Abdul Hafeez Shaikh, one of the fund’s founders and a former minister in Pakistan, from 2001-06, with a portfolio that included privatization and investment.
Shaikh heads NSR Dubai and focuses on private equity opportunities in West Asia and other parts of the continent.
Comfort zone
For now, only a few Indian PE firms are lining up for overseas deals with the others saying there are enough opportunities within the country. Besides, overseas deals are not easy to strike.
“How do you do the due diligence and verify things,” said Nitin Deshmukh, chief executive, Kotak Private Equity Group, a specialist PE arm of Kotak Mahindra Group. “These things increase investment costs.”
Not all such investors are open to new areas of operation. “These countries (Pakistan and Sri Lanka) are still too small and risk perceived to be too high for most mainstream investors,” Low Han Seng, executive director, investment management, at Singapore-based United Overseas Bank Ltd, which backs PE firms in India, said in an email.
For Seng, and perhaps for other investors like him, mainstream markets such as India and China are still countries of choice.
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First Published: Sat, Feb 13 2010. 05 49 AM IST