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Equity Investments – VC Funds Bet Big on Listed Firms

The non-existent primary market for equities over the better part of last year may have delayed at least five exits for Sequoia Capital India Advisors Pvt Ltd, but that has not stopped the Indian arm of the Silicon Valley-based venture firm from trying its hand at something new.

Sequoia has been aggressively investing in listed companies since October, rather uncharacteristic for a firm that has been doing only private market deals since it started investing in India in 2000.

“We just felt it’s a bad time to sell companies,” said Sumir Chadha, a managing director at Sequoia Capital India, last week. “(Instead), we’ve been investing more, and mostly in the public markets,” he added.

That trend of venture capital firms looking at growth equity investments, including those in listed entities, is fast catching on. Traditionally such firms invest largely in early-stage companies.

In March, NVP India, the Indian arm of another Silicon Valley-based venture capital firm Norwest Venture Partners, invested about US$15 million (Rs70.65 crore) for a less than 5% stake in OnMobile Global Ltd, a provider of value-added services for mobile phones. This was picked up directly from the market.

“Norwest is actively evaluating a number of opportunities in the listed space. We see a lot of value in public companies across sectors and we expect to make a number of investments through the secondary markets,” Sohil Chand, a managing director at NVP India, had said at the time.

Although rules laid down by the Securities and Exchange Board of India stipulate that anyone acquiring more than 1% of a publicly-traded company needs to disclose this to the stock exchanges, details of investments by venture capital firms are not public knowledge as they have been making these investments through participatory notes.

This instrument, issued by registered foreign institutional investors in India to a third party, hides the identity of the eventual beneficiary of the shares.

Sequoia had invested in Hyderabad-based Nagarjuna Construction Co Ltd between October and January this year, buying nine million shares at an average price of Rs53. It sold the shares at an average price of Rs118 per share. “In dollar terms, we invested US$9.7 million and sold our stake for US$22.3 million or 2.3x our money,” said Chadha.

Including Nagarjuna, Sequoia made seven public market investments between October and February 2009 from the US$400 million fund, Sequoia India Growth 1, according to Chadha; but he was not willing to share details of the other six. “We don’t mind telling people after we’ve exited, but we don’t tell people when we make the investment,” he said.

Sequoia’s US$400 million fund is fully invested now, though the US$725 million it collected in mid-2008 for its Sequoia India Growth 2 is untouched. The US$300 million early-stage fund raised last year is also “barely touched”.

Matrix Partners India, the domestic arm of another US-based venture fund, is also not averse to investing in publicly-traded companies in India. “We would consider them (listed companies) but this (is) not driven purely by valuation. Our approach is sector specific – and if the best company run by a top-notch management team in our investment size happens to be public, it does not stop us from taking a serious look at the opportunity,” Avnish Bajaj, co-founder and managing director of Matrix India said in March.

But at a time when the two and 20 model (2% management fee and 20% share of the profits, which investors in private equity and venture capital funds pay their fund managers) is under serious question, many limited partners (LPs) – investors in these funds – have also started doubting the rationale behind their managers putting money into public companies. Such investors can put money directly in listed equities and at a lower fee.

Chadha clarified that the vast majority of what Sequoia does is still private investing and that it occasionally invests in public companies where it has deep knowledge of the company and the sector.

It recently invested in privately held Mumbai-headquartered Ideacts Innovations Pvt Ltd and Trichy-headquartered Vasan Eye Care Hospitals.

“Our LPs are comfortable with this. We feel that there are times when public-market opportunities look very compelling and we take advantage of these... We take a long-term view on management teams and fundamentals. We exit early when the markets or a particular stock runs up very quickly,” Chadha added.

Such a trading call seems to be what Sequoia’s betting on for the other six of its recent investments. “Those are companies that we’ll be exiting shortly,” said Chadha.

Sequoia had planned to exit from Bharti Telesoft Ltd, AppLabs Technologies Pvt Ltd, SKS Microfinance Pvt Ltd, GlobalLogic Inc and Indecomm Global Services when these companies listed, but is yet to do so because of a non-existent primary market.

The collapse of Wall Street investment bank Lehman Brothers Holdings Inc in mid-September last year plunged the world into a liquidity crisis, and brought the primary market and merger and acquisitions activities to a standstill. The two are avenues that venture capital firms typically rely on to make their exits.

“We would make those exits, but only when we feel a little better about the public markets. Some of it we’ll look at (for exit) late this year or early next year,” said Chadha.

This article first appeared in on 8 June 2009.