Yesterday, I was able to catch up with Rob Chandra, a 10-year veteran of Bessemer Venture Partners, and its lead investor in India, which has attracted $40 billion in foreign capital this year and provided Bessemer with two IPOs.
I asked Chandra to make the case for why more investors should refocus attention on the country; he did so easily. Our conversation, edited for length, follows.
What’s one of the biggest differences between investing in Indian companies versus those in the U.S.?
In a lot of emerging markets, the investment opportunities tend to be working with families. In the U.S. context, you tend not to fund families. In fact, there’s a stigma in the U.S; it’s assumed that it’s not as professional, because in the U.S., there’s a lot of management talent. If you’re looking for a CFO or a VP of marketing, you can find one.
In India, there’s definitely a shortage of executive talent or management talent, so for a lot of businesses, you need trusted people you can rely upon. Sometimes you can find those people within your own family.
Are there new regulatory reforms that make India even more attractive to invest in 2010 than in the past?
None that are profound, but India is on a path for attracting foreign capital because it wants capital from legitimate sources. A lot of industries have already been deregulated, and that’s what’s encouraged investors who are trying to come in. Also, India is such an attractive place to invest because of its huge growth. The overall economy is projecting an 8% growth rate, and half of the economy is agriculture, which is a slow-growth industry; for the overall industry to grow 8% means that other sectors are growing at 30% to 40% per year.
What sectors are showing the most growth?
Infrastructure is one example. India has a poor infrastructure. Middle class citizens lack access to electricity every day. The roads, in terms of national highways, are still under development. Power and roads are two things that the government has really made a commitment to improving, and a lot of power companies have gone public and are growing rapidly. We incubated one, Orient Green Power, maybe three-and-a-half years ago, and it just went public a couple of months ago. There aren’t many businesses in India or the U.S. that can go public so quickly, but the market opportunity is very large and very attractive.
Another example is toll roads. The government has tried to improve the roads in India, but they’re still pretty rough. To attract $20 billion a year to fix its national highways, it is giving private companies the opportunity to bid to run part of the highway as a toll road, so companies are coming in and investing and recovering their costs by collecting tolls. One company we invested in, ITNL, India’s largest toll road operator, also went public earlier this year. It now has a $1.2 billion market cap and is projected to do $675 million in revenue this year, up from about $90 million in revenue four years ago. [Ed: Bessemer invested roughly $25 million in both Orient Green Power and ITNL.]
Where did both list?
The two exchanges in India are the BSC [Bombay Stock Exchange] and the NSC [National Stock Exchange of India]. They represent all the equity trading; in fact, most companies tend to list on both exchanges.
How long are their lockups?
In India, the equivalent to the U.S. Securities and Exchange Commission is the Securities and Exchange Board of India, which is more conservative than the SEC. So the requirements to go public and how to treat shareholders are more stringent. In the U.S., for example, lockup periods are six months. In India, it’s usually one year for investors and usually three years for founders, because they have to be committed to continue running their companies in a thoughtful way.
Also, in the U.S., investment bankers get to decide how to allocate stock, so they can [if they choose] allocate it to their favorite hedge fund clients. In India, it’s an open bidding process –- you get an allocation based on how you bid; the market sets the price.
And in the U.S., individual investors aren’t able to buy at the IPO unless it’s not a very hot IPO. In India, a certain percentage is always reserved for consumers, and it can only be given to consumers. So anyone in India can walk into local brokerage office and get issues at the same price as an institutional investor.
Do you think India’s approach is better or worse for investors?
There can always be the perception by developing markets that emerging markets are loose, so to counter that perception, the Indian government has taken really positive steps to provide for a stable market for foreign investors to participate in. It’s a really prudent, conservative approach. It’s also the way they’ve regulated their banking industry.
The kind of subprime mess and securitization issues that U.S. banks got into would never happen in India because none of it is permitted. They don’t have bad debt issues or foreclosure process issues or credit card debt issues. At some level, the conservative approach they’ve taken is paying dividends.
But isn’t that more a feature of its emerging market status, since it hasn’t had time to get into real trouble yet?
The scale isn’t so different. India has more middle class citizens than the entire U.S. population. But when we fund entrepreneurs here, they’re able to go out and get venture debt to go buy equipment, even if the company has only been in business for a day. In India, you can have a company that’s publicly traded and making $40 million in annual profit but it can only get debt if its founders personally guarantee it.
When a society has a limited amount of resources, it’s very [careful] with it. It allocates it in a very cautious manner. By contrast, the U.S. has been very wealthy and it’s had plentiful capital, and so at times, it’s been allocated into opportunities that are very high risk. People are always chasing for a small improvement on their yield.
Earlier this month, President Obama visited India, and you were part of the delegation that traveled with him. How meaningful was his visit for you as an investor?
When President Obama made his speech in India’s parliament, saying that the U.S. government will support a permanent seat for India on the U.N. Security Council, it was a huge milestone. It’s really the first time the U.S has extended such a political endorsement, and it sort of implied that India is an important partner in the U.S.’s Asia strategy, which has historically been much more focused on supporting Pakistan.
I think the U.S. recognizes that India is the strongest democracy in region — and one of few places outside the U.S. where democracy is thriving. So for the U.S. to say this, it elevates India’s status to a lot of countries around the world. [As a result], I expect more U.S. companies will buy India-based companies and vice versa. And because the India economy isn’t export-based or controlled by exchange rates, I expect a lot of fair and balanced trade between the two countries, which will be healthy for both.