When the world was sinking into a downturn in September 2008, US-based venture and growth fund New Enterprise Associates Inc hired ICICI Venture veteran Bala Deshpande to lead the fund’s direct presence in India. NEA India Private Ltd closed three deals last year in India when PE investments saw their worst fall in four years. "It was a great opportunity since valuations were more realistic than in 2007 and 2008," says Deshpande, senior managing director at the firm, in an interview with VCCircle. Armed with its new $2.5-billion global fund, NEA plans to pick up its pace with three to four investments this year. Excerpts:-
What is your assessment of the current deal-making environment?
Valuations have gone up. But, what I like about this phase of deal-making is that India has built businesses in the last decade that have great strength, inherent models and elements of growth which we can back. The risk factors have become more addressable. India is much more ready today in terms of people, risk capital and an understanding on how to grow. We have funds which are comfortable with 15-20% returns if the risk is very low and then there will be others who will continue to play the disruptive growth game earning them a much higher return. So, you will have sectors like MFIs and education where valuations continue to be high but within that you have to pick assets that make more sense.
Will you stay away from sectors where valuations continue to be out of line?
As a firm and as an individual, I have been betting more on emerging sectors rather than the discovered spaces. You can enter emerging spaces a little early and pay a little less due to the risk and uncertainty. So, I may not do a deal in microfinance at the valuations at which the last few deals were done but the reality is that the macro trends of these sectors are very attractive. So the question is that can I find an asset that meets my risk-return profile.
Would look at an incubation model in these sectors where you may back an experienced entrepreneur from scratch?
In fact, that is something that we are planning to do in education. I have been studying the space for the last three years and have a pretty clear idea of what I want. It may not purely be incubation but will be something from start. Since it’s very frustrating to find a good value deal in the education space, I may look for an experienced entrepreneur, get convinced about his format and back him. Or, I can also go to the other extreme late stage and invest $100 million in a pre-IPO deal because the risks have been taken off the table. These strategies could be undertaken to counter high valuations.
What are the other themes that NEA is excited about in India?
Healthcare as the opportunity is so large. NEA has done the widest array of investments from medical devices to psychiatric chains, and, I would like to leverage that expertise. The services sector in India accounts for around 60% of the GDP. But, what is this great play everyone talks about? If you take out banking and financial services and IT/ITES areas, there is a huge opportunity to pick and create large sectors. You have to back medium-large players in sectors that will become large five years from now.
We have heard a lot of people saying in the US that $2.5 billion is too big a venture/growth fund to generate the expected returns. What is your take on that?
If you look at buyout funds, they were talking about raising $10 billion vehicles at one point when there was a flush of liquidity in the market. But now, they have come down to around $5 billion. If you were to look at our team, we have a partnership of 25 people, which includes 15 GPs and another 10 partners. If you distribute this among the 25 partners, it does not come out to much.
You were in ICICI Venture for around 8-9 years. How different is it working in an international fund as against a bank-sponsored India fund?
I really value my years at ICICI Venture as we were creating the market for venture investing there. It was very entrepreneurial since there were no benchmarks to show us the way. We were one of the first to raise a third party fund and I also learned investment management. This is more about scaling up and heading operations of a global fund in India. We have to be completely aligned with a global strategy in terms of investments, how you do them and at the same time not losing the local flavour.