Q&A: Sumir Chadha, MD, Sequoia Capital

Last Updated: Wed, Oct 13, 2010 13:51 hrs

Sequoia Capital, which started operations a decade ago, has invested $800 million in 60 companies since 2000. While the fund continues to look for investment opportunities, Managing Director Sumir Chadha tells Shilpy Sinha that this is not the right time to invest. Also, the firm is looking to exit from seven companies in the coming year. Edited excerpts:

With the stock market revisiting the highs of 2008, have high valuations already become a deterrent for private equity (PE) investments?

Companies are raising funds at very high valuations. Many funds are not investing in India because of such high valuations. Though the GDP growth is good, we still need to see reasonable value in businesses we invest in.

The valuations are very high. In the public market, they have gone up 2.5 times as the Sensex has moved from 8,000 to 20,000. Simultaneously, valuations in the private market have moved proportionately, by 2.5 times or perhaps higher.

We have seen over $5 billion flowing in from PE players in the year so far. How do you look at the next half?
Given the high valuations, this is the time to stay away from both private as well as public investments. However, we see a lot of deals happening when the market is up. Last year, we invested in many companies because we believed valuations were attractive. We are not sure if we would like to invest at this level, though we will continue to look at deals.

Having started as a venture fund, you have moved to growth stage funding. When will you start looking for buyout deals?
At present, we invest in good Indian companies at all stages. We are one of the few investors in India who are stage-agnostic.

What kind of exits are you looking at more –strategic or public?
In the last one year, we have exited from several companies and are pleased with our returns. We took SKS Microfinance public and sold part of our stake in Dr Lal Pathlabs to T A Associates. We also sold shares in Mannapuram in the public market. We are a long-term, patient investor.

There are a number of companies which get listed at an early stage. Does that affect your exit plans?
Sebi should increase the threshold limit for listing, besides the size, scale, turnover and profit.

We have a number of companies looking to go public. Some others may be sold to strategic investors.

Are limited partnerships (LPs) happy with the returns from Indian private equity?
LPs have not received much from Indian private equity, given much of the capital in the industry has been recently invested. We don’t expect average returns to be very good owing to the oversupply of private equity capital in India.

Since the west is not completely out of recession, funds are flowing into Asian markets like India in search of earnings growth, which is strong in our country.

Do you think the proposed takeover norms will trigger more Pipe (public investment in private equity) deals?
The norms will definitely trigger more Pipe deals. There is a lot of interest among PE players to participate in deals through the public market without crossing the threshold limit. It is good for companies as well as investors. There is demand across sectors and we expect funds to flow not only in large-cap companies but also in mid- and small-cap ones.

How have PE players added value to companies?
Companies with PE funding have witnessed four per cent higher sales and five to eight per cent more scale. Five years ago, adding money was like adding value, but now that has changed. Now, one looks for a place on the board and working with the management.

How do you plan to grow SKS Microfinance? When do you plan to exit the company?
We are the largest shareholder and a promoter of SKS Microfinance. According to norms, since we are the promoters, we cannot exit from listing before three years. We have stayed invested for four years and exited part of our stake during the initial public offer. We are very pleased with the performance of the company and are a long-term shareholder in its business.

Which are the sectors you would like to invest in?
Financial services, infrastructure and consumer durables are going to attract a lot of funding in the coming months. We invest in sectors where we see the right value proposition.

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