Parag Saxena, Founding General Partner & CEO of New Silk Route, NSR Partners was named in the Forbes Midas 100 List of Top Deal Makers in 2009. That’s the fourth year that he was on the list in a row. He came in at number 28 this year, up from 31.
Saxena spoke about the economy, the markets and the possible opportunities that India had to offer.
Commenting on the markets, Saxena says, “We will see a drop that takes us down 2,500 points, which probably makes the market reasonable and makes it attractive again, from current levels.”
Articulating the reason for the pullback he said, “The more likely reason is that markets around the world that have risen sharply will cut back and that cutback then leaves global managers of money to pullback from equity markets globally, and some of that money is going to be pulled out of India.”
According to him, the long-term trend on the dollar is down versus many currencies. He says, “There is a huge expenditure that has been put up. At some point we will have to pay back the trillions of dollars that are being spent and even more that will be spent when the healthcare legislation is eventually settled in the United States.”
He doesn’t belong to the school of thought that thinks that Indian markets will see its highs being taken out by 2010. “I think that there is a real concern in 2010 that you will actually see the pullback. As the comparisons become hard the commercial real estate problems become concrete and visible,” says Saxena.
He believes that although short-term tightening of interest rates will be a bad thing, it eventually would happen. He sees some tightening of interest rates happening in the next six-nine months.
Here is a verbatim transcript of the exclusive interview with Parag Saxena on CNBC-TV18. Also watch the accompanying video.
Q: Was last year a difficult year to make deals?
A: Last year was a difficult year to make deals anywhere in the world. There was a big gap between expectations of entrepreneurs or promoters and where people who had capital were willing to provide it.
Q: You said that 2007 was a horrible year because valuations had gone so high and there was a lot of stupid money chasing these investments. Is it stupid money coming into the markets today or it is very wise money?
A: I don’t know whether it is very wise money but it is certainly more intelligent – at the headline level, you had money coming in, in the high 17s, 18s, 19s, 20s, 21s where the Sensex topped out and the opportunity was down in the 8,000-9,000-10,000 the second time, not the first time around, and you would be looking at reasonable paper profits today. In the end though, financial markets are the one place where people for some reason, if you hang a ‘for sale’ sign out in the financial markets, nobody comes. You go by t-shirts, jeans, ‘for sale’ sign attracts people.
Q: Was it tempting for people like you who are not really in secondary equity markets but really venture capitalists and the capitalists and private equity players; was it tempting in March of this year to getting into the equity market where you had perhaps more mouthwatering values there?
A: There were certainly some very attractive values in companies that we know. I think there are two important issues. In many companies liquidity is modest particularly for a fund the size of ours where to make an impact we need to have atleast USD 50 million in a position. It is hard to get that into a single equity. But that was good pricing.
The other issue – and here you start to differentiate between what your specific interest is – is that limited partners which is what we call our customers don’t like to pay our high fees for buying secondary equity positions. So we have to be thoughtful about what we do.
Q: You’ve got about ten investments in India. Were most of them made in the last year when the price has got more reasonable?
A: We made more of them in the reasonable price phase. In aggregate we haven’t made that many investments although we have made ten investments, we are less than one-third invested in our fund. Typically, the cycle of a private equity fund is that you take four and a half years to get invested which means every year you should be about 25% or so invested in a four year cycle.
We are about that and it is two and a half years. So we have held back but we are very eager to invest. The challenge today is to find deals that are attractive to us in companies that are attractive.
Q: Do you look at sectors or will you just look at companies or is it a particular company or a particular sector?
A: We are very broad. Our simple thesis is that the background that we are investing in is that the Indian consumer, the Indian individual’s gross domestic product (GDP) per capita is going to keep rising and we just have to find the right time and price. We cannot perfectly time these things. So we are sector agnostic.
Q: Let us get back to the Indian economy, when the budget was announced, I remember reading comments of yours which were about the fiscal deficit, Rs 400,000 crore borrowing programme would certainly crowd out in investments by the private sector. But do you think the government has just got lucky because growth has perhaps overtaken expectations?
A: It is hard to just say lucky, luck is the prepared mind meeting opportunity and this is a pretty smart government all said, there are some very bright people in it. At the same time, I think they have to be careful about making sure that government is investing in the right things. Government needs to invest in things that are truly long-term and won’t attract private capital quickly, but will deliver the infrastructure that is necessary over time.
So for the government to go into rural development, for the government to go into education, for the government to go into the less short-term profitable places is the right thing for government to do.
Q: That is the spoken intention of this government?
A: That is a spoken intention of the government. So let us hope that it gets carried through. The risk is and the other side which I know the budget is no longer the single statement of policy is that we don’t carry through with some of the disinvestment and some of the other methods and in fact government increases its investment in segments such as power et cetera where there is capital that is available.
Q: Is there worry there?
A: I think that there is real worry especially when you see large amounts of rupees going into sectors that you could have private investment in, attract private investment where they will come in, help support that process in the way governments can easing up the capital markets, building a fixed income market which is a critical lack in India.
Q: How do you read the strength of the equity market of the last few months?
A: Speculating on the equity markets is a very hazardous occupation especially on television. But I think that the rise so far, although it has been extremely rapid given that the Indian economy has continued to do well – it is quite interesting I spent my time between New York and India and the word ‘recession’ is used very differently in the two countries. They both said recession, one is talking about a 5% plus growth, the other is talking about a negative rate of growth.
But I think that there is still a fall to come on the overseas side, specifically in the US. Commercial real estate, over a trillion dollars of loans are going to get renegotiated over the next year and that is important because to the extent that capital is constrained in flowing overseas, it may have some impact on India.
Q: So you don’t think we are in a recovery, you think this is just a spike that could reverse?
A: I think that it could reverse. I don’t think it will go back to where it was. But there is some risk only because of this capital constriction point not on fundamentals that you could see a pullback.
Q: The big worry in the last couple of weeks and last month or so has been China and that China could slow down; you don’t think that is a worry that really gives us sleepless nights?
A: At the present time, I don’t have that concern on India.
Q: For the global economy?
A: I think the global economy, the bigger single risk is what I refer to which is commercial real estate will constrict, the banks will constrict, it will create a series of problems that will have to be dealt with in the short-term.
Q: How about the dollar because a weak dollar so far has helped emerging markets and India in particular because the inflow is coming to India but if the dollar should weaken maybe 5-10% from here in a short-term, we could actually see a reverse of flows, how worried are you about the dollar?
A: I do think that the long-term trend in the dollar is down versus many currencies simply because of the huge expenditure that has been put up. At some point we will have to pay back the trillions of dollars that are being spent and even more that will be spent when the healthcare legislation is eventually settled in the United States.
Q: What kind of money is waiting to invest in markets like India now?
A: I think there is a large pool of money that is looking to invest, that is waiting for problems to settle. It is always hard to define exactly when that happens, when those problems settle but that capital is there. I think two things will bring it in. A sharp drop in markets will attract people because people have learnt that at some point there is a reward so long as you don’t go in at absurd valuations.
Q: How would you define a sharp drop?
A: I guess a drop that takes us down 2,500 points probably makes the market reasonable and makes it attractive again from current levels.
Q: So we are looking at from 17,000 down to about 14,500?
A: 14,000-14,500, right.
Q: What is the likelihood?
A: I am sure it will happen at some point. The only question is when. Will it happen? I think yes.
Q: What will contribute to that?
A: There is the unpredictable which certainly will happen. A variety of things will happen and completely exogenous events that can occur and that could be one reason. But I think the more likely reason is that markets around the world that have risen sharply, cut back and that cut back then leaves global managers of money to pullback from equity markets globally, and some of that money is going to be pulled out of India.
Q: The cutback will come about earlier because of the real estate in the US?
A: Yes because of commercial real estate, in other countries perhaps because markets have also gone up a lot in a number of countries and just as we have been talking about India they have gone up just as sharply elsewhere and economic growth has not been quite the same as it has been here. So, earnings don’t match up.
Q: This is interesting because most people we talked to have now the pessimism of March, we have given way to almost unbridled bullishness but you are still fairly cautious?
A: In the short run they are likely to continue to be correct. Earnings will come through, the reason for that is markets work very heavily on year over year comparisons. The comparisons that come up in the next six months will be easy comparisons because they will be compared to very poor quarters last year. We have to go back and think about what they are going to be compared to.
And so the near-term rises will be strong. But after that once you start to see the impact of the fiscal stimulus that was applied in North America, in Europe, in China, the comparisons will get harder. Valuations could possibly have risen from the levels at which they are now and they will pullback from there.
Q: You don’t belong to the school of thought that thinks that globally or especially in India we will see those highs being taken out by 2010?
A: No, I think that there is a real concern in 2010 that you will actually see the pullback. As the comparisons become hard the commercial real estate problems become concrete and visible.
Q: How about the problems of the exit game of central banker or the exit game of governments if they should think that it is time now to ease these stimulus? How much of a deflation of the economy can you expect because of that?
A: I think that the two things we have to worry about depending upon where you are and a very important wild card is Japan. So the two things you should worry about is government are going to – at some point if you continue to see strong growth in stock markets, if the rate of increase in unemployment slows down then I think that there is a real risk that governments will start to tighten credit, they will stop being as accommodating as they are. Interest rates will rise; the fear of inflation will overtake the fear of deflation because people will point back to the vast amount of stimulus that has been applied. So you could see a contraction of credit from government.
The wild card which I think is going to be very important, my own belief is that the last contagion in the financial markets began when the Japanese interest rates took its first uptick and we don’t know what is going to happen there. You have a new government that effectively, this is the first time they have got real power in a meaningful mandate and what they will do is unclear at the present time.
Q: So Japan is a wild card, not China, not the American demand slowing down but Japan?
A: I think we understand what America is doing, we understand what China is doing, we understand what their policy is likely to drive. We have somebody new at the wheel; a new driver has come in to drive the car. We’ve never seen this driver drive before; we don’t know whether he drives fast or slow, uses up a lot of gas, they brake suddenly, you don’t know.
Q: You spoke about interest rates. How do you view interest rates at this point of time or do you think it would be disastrous or certainly bad for the economy?
A: I think in the short-term tightening interest rates will be a bad thing, but eventually I think it has to happen.
Q: By when?
A: I would say you will probably see that in six-nine months. You will start to see some tightening of interest rates.
Q: If that should happen, if we should see a slowdown, are there sectors that you would rather be in as defensives?
A: Those are easy, the necessary ones. So I think healthcare will continue to be a fairly safe sector. There are other reasons why healthcare regardless of whether it is on the service side or on the pharmaceutical side I think will be an attractive place to be in considering the perspective of the equity markets. If interest rates are going to rise, the financial sector is going to be less attractive so you would rather not be there, any consumer staples will be the place to be in, things that people have to buy even when there is a slowdown of the economy because again it is the recession word that’s used in India which is slower growth not really negative growth.
Q: Gold – does it surprise you that in a time when we have seen lots of asset prices going up, gold has also gone up because gold has always been thought of as a so a safe haven investment. Does it imply that somewhere people are worried that this is not for real and we also need to hedge our bets?
A: I think that the rise in gold reflects the organised purchase of gold. It is the rise of pure hedge of funds that are dedicated to the purchase of gold and the ability of people to channel that. This is one of the less studied, very interesting phenomena that is occurring globally, which is that the channeling of money into very specific tools gives rise to great power in the hands of the people who control those pools and not of phenomena that we have had before in the form that it exists today. And this can happen with almost anything. Gold is an example.
Q: Why has gold been picked this time?
A: For the reason that you mentioned that the mythical belief, the almost legendary feeling that gold will hold its value over a long period of time versus inflation.
Q: Was it the same organised buying that took the price of oil to where it was a couple of year or year and a half back?
A: I very much believe that. I think that it began with very focused pools of money that were focused on commodities which largely bought oil, on pure oil related funds as well then in that same bandwagon hedge funds, which started to put disproportionate amounts of their assets into oil.
Q: What disillusioned them?
A: The end point of this disillusionment, a very interesting study if you go back and look at the hunts when they tried to get around silver and corner the silver market in the late 70s, early 80s, it peaked out in January 1980, and that was the last big rise in the price of gold too, that is when gold crossed USD 800 per ounce and then it fell back to under USD 300 per ounce.
At the end point you have to find somebody who is going to buy that stuff, so you keep buying it, you squeeze the market but then at the end of it you do have to find someone to sell it because you have got such a lot of it. If all the interest rate buyers have already bought whatever it is gold, silver, oil then selling that starts to become a challenge. So at some point rationale man on the street stops and says that is absurd and that begins a trend.
Q: Absurd at what point for oil at USD 120 per barrel?
A: I guess it was at that level the last time around. Oil is a different thing from gold though. Oil is depreciating, the planet is growing and if you study what happens to the compounding effect of the planet, people on the planet growing at what sound like small numbers but 1.5% population growth and if you look at the depreciation of oil even at modest rates, that is a lethal combination for oil. So that crunch will come.
Q: What is the outlook on oil for you?
A: What I am saying is a long-term outlook and its guidance is only that we should be looking at other forms of energy particularly in places like India, which are oil short. We should be looking at other ways to raise energy for our people.
Q: Let me get back to you as a venture capitalist, when you were at Chancellor and Investco, you were originally investing in companies like Starcom and Starbuck and Amgen, consumer focused companies, do you see similar companies coming up in India now?
A: I think that you will see all of the kinds of companies that we have invested in. I think a bigger challenge in venture is going to be just the institutionalisation of the venture industry. It reminds me of the venture business at the end of the 70s in the US, we had to stumble, make some mistakes, form syndicates, convince promoters that you can add value. That is a necessary step for early stage venture financing to occur. That is one part of the problem.
You asked about whether these kinds of companies will come up and succeed, of course they will.
Q: Do you see such opportunities in India today?
A: You have interesting companies like Coffee Day and so on that are parallels of Starbucks. I think that there are many other like opportunities, one that I’ve always wondered about since I was a kid and I used to watch or read about McDonalds or Kentucky Fried Chicken and I still wonder why don’t we have a good Udupi chain, why don’t we have a good chole-bhature chain. We have fabulous cuisine in India.
We do have a few white table cloth type restaurants. So you have got the Oh! Calcutta chain, you have got the Mainland China chain, they are owned by the same people, but I think that there is a paucity of cuisine from India instead of just aping Western concepts, instead of creating another Pizza Hut; we should have so many more things.
Q: Are you talking to entrepreneurs who are doing that?
A: I am constantly looking for entrepreneurs. In fact I hope some will call me when they see this on television.
(MoneyControl)
0 comments:
Post a Comment