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Davos 2019: It’s Been Survival Of The Fittest For Private Equities, Says IFC’s Mehta

Private equities’ performance improved in the last four years as a changing business cycle “weeded out” non-performing fund managers, according to International Finance Corporation’s Atul Mehta.

“There was a significant equity activity ramping up until about 2007-08. Then we saw some indigestion in the last four to five years,” said Mehta, global head of telecom, media technology, venture capital and funds at IFC, told BloombergQuint on the sidelines of World Economic Forum in Davos, Switzerland. It became easier for investors to identify fund managers to rely on to produce the returns they like, he said.

Mehta also said IFC has moved to investing in the retail space to capitalise on the opportunities in that sector.

Watch the full interview here:

Here’s the edited transcript:

What is IFC’s exposure when it comes to India? How much money have you invested?

We’ve got about $0.5 billion in India. We’ve been active in for a long time in private-equity fund space and we’re increasing our activity in the technology space. We’re very bullish on India. We’re seeing a lot of opportunities. We’re seeing a maturing of venture capitalist ecosystem as well. So we think there is a lot of potential going forward.

How much of your money is invested in PE and venture capital funds and how much is direct investments?

It’s about about half and half. If you look at IFC globally. A third is in funds and two-thirds in direct investment. India is a little bit unusual in that regard. We’ve got a higher proportion in funds for my group. If u look at IFC as a whole in India, we will have more direct equity investment because we cover all of the funds.

Which are the areas you have liked in the last few years?

In PE, we’ve seen a maturing. India went through up and down, There was significant equity activity ramping up until about 2007-08. Then we saw in the last four-five years some indigestion. Many of the firms that were invested in this period din’t do well. But since then, we have significant improvement in performance. India has been one of the better performing markets now. More recently for PE, you’ve seen more exits so investor are seeing you can not only get in but you can get out. We’re also seeing weeding out among the fund managers. So ur being able to determine wheat from the chaff. Its becomes investors to say here’s someone who has been through 1-2- cycles whom we can rely on to produce the returns we like.

How much is limited to tech, media and telecom in terms of direct investment?

We’ve historically invested in telecom but not recently. In telecom too, you have had weeding out and we have less amount of competitive advantage in the telecom space currently. In technology, we’re active. We started off in the business to consumer (B2C) space. We’ve done well in that space. We’ve got companies like Lenskart, Bigbasket. More recently we’ve moved to business to business (B2B) space. We’ve invested in companies like Moglix, com in transportation space as well. We’re gradually evolving to where we see the opportunities arising.

It’s all tech driven and these are disruptors. We’ve made investment in a company called Blackbuck. What’s it doing is improving the efficiency on city-to-city transportation. There is a challenge between transporters and shippers in terms of connecting. You will often have trucks returning empty one way or wasting a lot of time waiting for load. This was done offline with a lot of middlemen. Blackbuck is finding a way to allow both sides to connect more efficiently

In education space, we’ve invested in a company called Byju’s. They’re helping parents in effect complement what the children study in school to make sure effective learning. They’ve had an uptick as well.

Has the investment space in India gone through a structural change? Is political or policy stability no longer an hindrance for investing?

It has been changing quite significantly. You’re certainly seeing, there was a lot of money that came in during the tech space and there were a few linears. That seems to have picked up in the last year and a half. were also seeing govt is interested in understanding what the challenges are. There are still hiccups on stability of regulation in this space. Most recently, the controversy about angel tax- Those are teething problems which hopefully get addressed as time goes on.

Has India’s structural changes help to scale up investments?

You have seen maturing of ecosystem. In India, there was lot of money in very early stage of ecosystem. But lot of companies were stuck on next phase. Once they prove their concept, they need to scale and there wasn’t lot of money for scaling. We are seeing that part of system gradually filling out. I don’t think it is well addressed yet. But you are beginning to see more opportunities. Then there is more money at later stages. Especially, overseas money. Once they see companies scale to certain point, they are willing to come and help to scale it further.

Have you been able to invest large money in single investee company versus 10 years ago?

The way we invest, we try to get in early and try to double down. You will see that in many of our companies. Some of earlier investment in Lenskart, Big Basket, the companies we invested in four-five years ago, we have incrementally added to it. We have got much larger exposures. We have got 25-30 million in those type of investments. We are starting with 15-20 million investments to companies like Blackbuck. We have those investments to start with. If the companies are successful and if they need more money, we will support them as they grow.

Would your scale of investments change? Will you be able to put more money to work in companies like Big Basket if you have less confusion among things like FDI policy?

As far as investors are concerned, stability is key. Investors invest on certain basis. They would not like the goal post to be moved against them. There is recognition over the same that regulators and politicians are juggling multiple constituencies that doesn’t make easier to invest. So, you need to try and access the circumstances under which you are investing. We invest in emerging markets. We see tensions in many different countries. We do try to advice governments that stability is best approach if you want to continuously attract investors.

Have you made any recommendations on angel tax and FDI policy issue?

We do provide to give feedback and they have reached for our input.

But doesn’t it change or alter the way you look at India as investment opportunity?

Absolutely. So, there are two different factors. One is the intrinsic of market and how attractive it is. The other is what are some of the other factors which might impact returns. You have to balance it. you take long term view to get over interim policy hiccups.

What companies are you looking to exit in next few months?

Early investments will automatically mature and show some exits. Some might exit by virtue of trade sales depending on nature o business they are in. Some of our early investments are in Lenskart and Big Basket. Some of recent investments are Black Buck and Btju’s. We are not in hurry to exit it.

You listen to a lot of gloom in Davos that global economy is slowing down. Does that make you happier man saying that if asset value comes down you would add more money to work?

I feel very optimistic. I invest in digital space. We are seeing huge opportunities and potential. I am hopeful that much of the gloom is short term. You see these cycles. I don’t think this will impact the digital economy.