Tech is the Best Way

PE/VC Secondaries in India is the truth

The decade-old ripe venture capital investing business in India is now going through a churn as most funds are coming to an end of their lifecycle. With that comes the pressure to return capital to the investors. With exits far and few, some of the funds are now busy closing asset sales or selling their entire funds to other private equity funds, also known as secondaries.

NEA’s India fund has been on the block for some time now since Bala Deshpande, its senior managing director, and three other teammates from NEA decided to launch their own fund early last year. Deshpande and her team though are still managing NEA alongside their new fund raise. Currently, Deshpande and her team are on road to raise nearly $250-300 million for their fund MegaDelta Capital Advisors. An email sent to Bala Deshpande and an SMS sent to NEA officials in the USA on 17 September went unanswered. Amit Gupta, founding partner at NewQuest, declined to comment on any specific deal.

NEA had entered India in 2006, by launching NEA IndoUS Venture Partners led by Vinod Dham and Vani Kola. Kola went on to launch her own fund Kalaari Capital in 2012. NEA’s India investment figures are not available publicly, but globally, NEA manages around $20 billion across 16 funds. According to The Wall Street Journal, NEA had raised a $3.3 billion fund last year. Globally, NEA is a multistage investor in the technology and healthcare sectors.

In India, even though the fund is undergoing a sale process, it continues to participate in follow-on rounds of its existing portfolio companies. In fact, NEA had introduced NewQuest’s partner Amit Gupta to most of the investee portfolio company founders some time back. Gupta was in India during the first week of September for deal negotiations, the first person added.

A fortnight ago, one of NEA’s investee firms, Manu Agarwal-led Naaptol Online Pvt Ltd, managed to raise nearly $15 million from its existing investors. Naaptol is an omnichannel shopping platform which counts Mitsui & Co., JP Morgan and NEA as its investors. Omnichannel platforms are those which use both online and offline mediums for sales. “The company has raised $15 million on pro-rata basis of which $11 million has already come in from other two investors, the rest $4 million, supposed to come in from NEA, will come through once they complete their transaction process,” said a third person familiar with the matter.




He added that once the transaction is closed, a decision will be made on the transfer of board rights. At present, NEA has a board seat at Naaptol.

If this is a coincidence of secondaries, here’s another tale. Naaptol’s other investor, financial services firm JP Morgan, wasn’t really its original investor. It’s only in 2015 that its original investor, Menlo Park-based early stage investor Canaan Partners, led by Rahul Khanna in India, sold its entire portfolio to its existing limited partner (LP) JP Morgan Asset Management and disposed of the fund. In private equity parlance, a transaction where one PE/VC funds stake is bought by another fund, it is known as a secondary deal. Essentially, the asset or the entire fund is changing hands for the second time with another fund buying it.

There are broadly seven types of funds strategies in the world. Early-stage venture capital funds, venture capital funds, private equity, fund of funds, growth private equity, buyout funds and secondaries.

There are various types of secondaries. First, where a PE or a VC fund sells its existing stake in one of its portfolio company to another fund. Second, where a fund is fully sold off with all its assets to another private equity fund with all the rights and powers of the fund manager. When someone sells the remaining assets of an ageing private equity or venture capital fund, it’s known as a tail-end transaction. This helps them move on to raise another fund.

The deal between NEA and NewQuest Capital is the second type of secondary deal as it aims to provide solutions to an existing general partner (GP). A general partner is the fund manager.

Apart from Naaptol, NEA’s portfolio firms include Hyderabad-based infrastructure firm Vishwa, digital firm ValueFirst, specialised in-vitro fertility firm Nova IVI Fertility, renewable energy firm Infinitas, aviation engineering firm Air Works, among others.

Some of the investments in NEA’s portfolio are a decade old. And they are yet to be exited. These firms include ISGN, a knowledge process outsourcing firm, and enterprise mobility solutions firm ValueFirst.

The New (con)Quest of secondaries


NewQuest Capital Partners is a pan-Asian secondaries firm which is currently deploying from its third fund, a 2016 vintage fund with asset under management (AUM) of $540 million. NewQuest has a total AUM of $1.3 billion. Earlier this year, global private equity firm, TPG, invested in the secondaries specialist firm, and as part of the deal, NewQuest will work closely with TPG across Asia.

“In the last six-seven years, we have deployed over $500 million in India across deals which include buying out assets from other PE funds as secondary deals, co-investments. As the market matures and becomes attractive, we feel there are good deals to be done; India is becoming a larger market for us,” says Amit Gupta, founding partner of NewQuest Capital.

NewQuest has done direct deals in India where they own and manage the asset, co-investments and also provide solutions to VC funds, where they become the significant or sole limited partner and continue to leverage on the selling fund’s existing GP relationship.

According to VCCEdge NewsCorp, last year, it acquired the India portfolio of venture fund Draper Fisher Jurvetson (DFJ) for an undisclosed amount.

“It is only six to seven years back that secondaries started gaining traction, not just in India but across emerging Asia. This a reflection of a maturing private market in Asia. In Europe and the US, nearly 40-45% of exits happens through secondaries, but in India, that pool is very small. But with the increase in exits, this will grow further,” adds Gupta. Gupta here is talking about secondary asset sales.

At present, China holds the largest market share in terms of NewQuest’s investments, followed by India with nearly 35% of the firm’s capital commitments, and it is only slated to increase further.

Gupta explains, “Since January this year, we have deployed more than $130 million and we are looking to commit additional $200 million by March, including co-investments.”

NewQuest usually holds assets for three to five years and has made returns of 18-20%. The fund is actively eyeing deals where it can buyout GPs.

One of the reasons for the rise of secondaries in India, where funds are fully sold out, is that most companies where venture capital funds have invested are yet to mature and VC funds have come close to the end of their fund life.



“Most VC funds have come to the end of their lifecycle and are seeking an extension of another 12-18 months to close sales,” says an investment banker who advises specialist secondary funds in India. “Some of these assets are bad investments which won’t make any money but there could be some which will in a few year’s time. Hence, secondaries specialists are keen to pick these portfolios.”

One part of the argument is true that companies have taken time to mature, but some funds have found it difficult to clock exit (even after a decade of investing) as some of these investments have turned sour.

Because these are leftover assets or assets which are yet to mature, secondaries funds buy them at a huge discount to their mark-to-market value.

The banker further explains, “Most of the secondary deals where specialist funds buy these bunch of leftover companies or funds entirely, pay roughly 20-50 cents to a dollar.”

It ideally means an investor who had paid a dollar in the fund will take home not more than 50 cents after ten long years, at times 12 years. To add to the sorry state of returns is the currency depreciation. Between 2006-08, a dollar meant anywhere between Rs 44-39 apiece. Today, one dollar is equivalent to Rs 72.66. The returns, as you can see, are completely dismal. And this is without accounting for taxation. All in all, it’s a sordid story for LPs who are taking money home from these vintage venture funds who have failed to do well.

But Gupta argues that there is a misconception that secondaries happen at huge discounts.

“There have been deals which we have done close to cost base. Most asset sales that we have been part of, have been through some sort of process, and in those cases, deals have happened more at the market price. Discounts are more common in cases where LPs are selling stake, although discounts are declining.”

Some of the secondary funds which are active in India include NewQuest Capital, TR Capital, HarbourVest Partners, among others.

According to VCCEdge NewsCorp, four funds have been sold out since January this year. Financial services firm Edelweiss’ alternate asset arm, Edelweiss Alternate Asset Advisors, has acquired two real estate funds of Milestone Capital. US-based General Infrastructure Partners has bought out private equity fund IDFC Alternatives’ infrastructure fund. And secondaries specialist TRG Capital has acquired JP Morgan’s Asia infrastructure fund which includes its investments in India.

IDFC Alternatives is also in the process of selling off its real estate fund and general private equity fund.

In fact, in its quest to find more deals and deploy significant capital, NewQuest and TR Capital have established full-fledged offices in India. NewQuest launched its India office last year with Sachin Khandelwal leading the practice. Khandelwal was previously working as a principal at consulting firm Bain & Co. They have a team of eight investment professionals in India.

“By and large, what they are acquiring [in India] are still some time away from maturing, and if you see, the people who are running NewQuest are ex-bankers from India and who have the ability to undertake deep due diligence for these assets and they understand the Indian market,” said an investment banker who has previously worked with NewQuest to sell off a fund portfolio.

He further explains that when they buy a portfolio from a fund, most of them are stressed assets, only a few would be able to deliver returns, hence their returns expectations is lower at 20-25%, far lesser than pure private equity investors.

As the first decade of the Indian startup ecosystem comes to a close, investors believe that most of these companies would take another four-five years before they are listed on the public markets. Or, for that matter, when a meaningful exit is recorded. With more investors seeking liquidity from vintage funds, secondaries should gain more momentum in India in the next few years, bringing in more new institutional investors in the country.
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