Warburg's returns on the Bharti Tele-Ventures deal has made the whole venture capital world sit up and take note of India Rajesh Khanna Co-Managing Director/Warburg

If anyone in the venture capital industry needed proof that India is an Asian El Dorado, then it was delivered on the front pages of pink dailies early February. Warburg Pincus, the Big Daddy of private equity industry with $14 billion (Rs 61,600 crore) under management globally, sold a 3.2 per cent stake in Bharti Tele-Ventures for an eye-popping $306 million (Rs 1,346.4 crore). Just six months earlier, it had offloaded a similar stake, but for just $208 million (Rs 915.2 crore). Envious rivals reached for antacids because six years ago when Warburg picked up an 18.5 per cent stake in Bharti, it paid a bargain price of $290 million (Rs 1,276 crore). Already, though, it has raked in more than $500 million (Rs 2,200 crore) by selling 6-odd per cent, and the remaining 12 per cent is still worth a billion dollars. "It's a once-in-a-lifetime kind of deal for any private equity firm anywhere in the world," drools a rival.

In fact, in August last year, soon after its first tranche of sell-off in India's largest cellular company, Warburg's Co-President Charles R. Kaye himself wondered aloud at the jackpot his firm had hit. "After 10 years in Asia, Bharti represents one of our most successful investments... This transaction really validates the Asian private equity story," Kaye had preened. This time around, he must be busy writing out fat cheques for Rajesh Khanna and Pulak Prasad, Co-Managing Directors of Warburg in India.

Come to think of it, the other VCs have little to gripe about either. By all accounts, 2004 has been a golden year for venture firms in India. For one, there were record exits, 30, according to Chennai-based industry tracker TSJ Media, not counting some smaller ones that fly under the radar. That's a clear sign of exit routes improving, with options like IPOs and M&As becoming available to the firms. For another, return on investments is soaring. The 30 deals have fetched internal rates of return (IRR) of between 30 per cent and 250 per cent.

Despite taking risks with start-ups, Ramnath's firm has raked in high returns Renuka Ramnath MD & CEO/ICICI Ventures

That's a far cry from the early days of venture investing in India (we are talking about mid- and late-1990s) when firms big and small burnt their fingers with dotcoms or other dubious old-economy entrepreneurs. For example, Ashish Dhawan-founded ChrysCap had to write off $20-25 million (Rs 88-110 crore) invested in dotcoms that went nowhere. But that's small change compared to the $450 million (Rs 1,980 crore) ChrysCap manages today. Similarly, Citigroup Venture Capital International (CVCI) had 30-odd investments in the range of $2-10 million (Rs 8.8-44 crore), but has since rationalised its portfolio down to 20 (of which a dozen are new investments). Says Dhawan of ChrysCap: "In 2004, the industry as a whole has given back significant amounts of money to investors."

ChrysCap itself made three exits, clocking annualised returns of 31 per cent. Among them, UTI Bank fetched a stellar 250 per cent over the $8 million (Rs 35.2 crore) made just the year before (2003). Dhawan is, as the saying in the industry goes, already "in the money" with several of his other investments including ivrcl and Mphasis, and he could soon become liquid in the new ones such as Suzlon Energy and Yes Bank, which are headed for IPOs. ICICI Ventures too claims a similar IRR (nearly 40 per cent) from about 20 exits it has made in the last 18 months. "I can't share any other metric at this time other than the fact that I am very relaxed," says Renuka Ramnath, the firm's MD & CEO. Two of its big winners could be Biocon, which went public in April last year, and TV Today (part of the India Today Group that publishes this magazine) that made its maiden public offering in January 2004.

"In 2004, the industry as a whole has given back significant amounts of money to investors" Ashish Dhawan Sr. Managing Director/ ChrysCapital

In the case of Actis, a Delhi-based British fund, it made six exits last year, taking out $164 million (Rs 721.6 crore) on investments of about $60 million (Rs 264 crore) in four years. That's an IRR of roughly 34 per cent. Actis' big bucks came from its $32-million (Rs 140.8-crore) investment in UTI Bank in 2001 that it sold to HSBC for $107 million (Rs 470.8 crore) last year. Another big winner was Glenmark Pharma, where it made four times the money by selling a quarter of its holding. The remaining $9 million (Rs 39.6 crore) of investment is already worth $80 million (Rs 352 crore). "It's impressive to do a higher multiple over a longer period of time rather than higher percentage return in a short period," points out Donald Peck, Actis' Managing Partner. That means Peck is in no hurry to sell off the remainder of his stake in Glenmark. Similarly, Baring Private Equity, which holds 36 per cent in Mphasis, says Partner N. Subramaniam, will wait for an opportune moment to sell out.

It's not just private equity investors who've pulled in the moolah. Even early stage investors and VCs have struck good multiples. Infinity Ventures sold its Rs 1.9 crore worth stake in Indiagames for Rs 29 crore to a Honk Kong-based online gaming company in December 2004 (a multiple of 15 times in five years). It also hopes to make at least Rs 90 crore from its Rs 7.7 crore investment in Indiabulls (where it has already made Rs 30 crore through partial exits).

WestBridge Capital, which has invested $70 million (Rs 308 crore) in companies like ICICI OneSource, Applabs and STI, expects an IRR of 30 per cent or above. "All the companies have received multiple offers of acquisition from the us and Indian strategic buyers, but our view is that given the strong growth rates (50-80 per cent annually across the portfolio), we will make higher returns by exiting at a future date," says K. P. Balaraj, the Bangalore-based Partner at WestBridge.

Coming Of Age

Needless to say, there are vital lessons that the VCs have learnt over the last five years. "One lesson is, invest in market leaders," notes Ajay Relan, Managing Director of CVCI, which invested in 30 companies in the last nine years with its fair share of write-offs. But its more recent investments in i-flex, Polaris, Progeon and Daksh eServices (sold last year to IBM) explain the shift. If CVCI can't invest in market leaders, it will look for them in niches. Any misgivings that Relan may have had over his initial investments are long gone. CVCI's India investments of $300 million (Rs 1,320 crore) are now worth $1.1 billion (Rs 4,840 crore), translating into an IRR of 35 per cent. Says Rajiv Memani, Country Managing Partner, Ernst & Young, who has worked closely with many of the investors: "The quality of investment has been good in recent years. So when it took five years to exit earlier, it's not more than three now."

On the whole, though, VCs have learnt to be a lot more focussed, but flexible. Like in mature markets, there's a VC caste system emerging, with small funds like UTI Venture Funds and SIDBI Venture Capital still open to funding startups, but those at the top of the food chain-Warburg and Temasek, for instance-are doing deals upwards of $50 million (Rs 220 crore). Besides, VCs are developing a taste for publicly-listed companies and buyouts (see VCs Get Smarter). Says Gaurav Dalmia, an investor in GW Capital and Infinity Ventures: "The Indian private equity community has grown 25 years older in just the last five."

What does a maturer industry with increasing exit options mean? More confidence in the system and, hence, more investments. Last year, as several firms were getting out of their investments, they were also raising new funds to invest (as we predicted in The Year Of The VC, BT, February 1, 2004 issue), but this time with a sharper focus on the sectors and the size of deals. For instance, in 2004 alone, private equity funds worth $1.3 billion (Rs 5,720 crore) flowed into India (minus the $500 million, Rs 2,200 crore, gecis deal). This is almost double the $770 million (Rs 3,388 crore) that came in the previous year. According to Vishal Nevatia, CEO of GW Capital in India, it's likely to grow by 25-50 per cent in the next two to three years. "There is a tsunami of capital pouring in," says Karam Butalia, MD and Global Head, Stanchart Private Equity, "buoyed by the spate of exits."

Believe it or not, early stage investing may also come back into fashion, as more and more Silicon Valley investors jump on to the India bandwagon. According to Ranu Vohra, co-founder, Avendus Advisors, there is a major supply of money coming in the $10-million (Rs 44-crore) and below category. "In every segment of the VC and private equity market, there is action," says Vohra. While that may be terrific news for entrepreneurs, for VCs it could be a nightmare. With more money chasing just a handful of good deals, VCs will be hard-pressed to strike the kind of bargains they have in the past. Ergo, the industry will need to recalibrate its expectations. But don't expect any VC to lose heart over it. The bet is still on India.