Contrarian's Business

By Ramesh Akkineni

from an interview with Gaurav Dalmia

Third, people are realising only now, after the whole cycle is over, that private equity investment is essentially a contrarion business. People who chase the stock markets and make lots of private investments at fancy valuations by taking signals from the booming stock markets generally end up losing a lot of money.

Let me give you an example of a company called IndiaBulls, which Infinity invested in end 2000 when the index was 4000 and falling! We invested because we saw that this sector was out of favour though only temporarily since the long term prospects were excellent for a company which built a retail broking franchise on the back of technology driven systems. The management team was excellent and we backed them. Had the markets been booming and the mood irrationally exuberant, we would have been offered some ridiculous valuation, from which we would not have had any upside whatsoever. The business model and team was excellent, the mood was so-so and was reflected in our incoming valuation, we had the self confidence to make a contrarion bet. All this added up to us making a very handsome return.

We look at real estate in pretty much the same way as any other private equity investment. A year or so ago I met someone and he asked me why I was doing real estate since our business was technology. I had a tough time explaining to him that my business was not technology or chocolates or real estate. It was investing.

We have a black box approach towards investing. We like sectors, which are growing fast; where there are barriers to entry - not determined by capital but by a business franchise; which is not capital intensive and has free cash flow. Outsourcing is one big area. So is light engineering. So is pharma. I like speciality chemicals. I like real estate. I like invisible businesses like logistics since they have increasing returns to scale.

What was your experience during the dot com boom and bust that happened in the early part of the new millennium? What lessons, have VCs learnt from this? Will we see that kind of frenzied growth in IT ever again?

Dot com boom was like any other bubble. More dreaming, less planning. More greed, less ambition. Less rationality, more rationalisation. People thought the new economy was different. It was dead wrong. The new economy was growing faster than what anyone was used to. It was a fixed cost business, which meant the winner gained a disproportionate portion of the spoils. But what it took to get there was standard old economy stuff: good management, good judgement, quick implementation. Less power points, more power! VC’s funded every crap that came their way since they were new and immature as well. For every Egurucool (not just a bad spelling, but also a bad business model), there was a JobsAhead or a Naukri.com (who picked their niche well and went after it with determination and are today raking it in). I think the bubble and its aftermath matured a whole generation of people and that is good.

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