India Growth Fund: Seed Capital Harvests Growth

Since the investment from the India Growth Fund, Sabare has more than doubled its workforce from 800 employees in 2005 to more than 2,000 today. Photo Credit: Sabare

Small and medium enterprises (SMEs) are the most dynamic segment of the Indian economy, and their growth generates ripple effects in urban and rural areas – creating jobs, fueling small-scale businesses through the supply chain, and expanding prosperity. But the equity marketplace in India virtually ignored SMEs until recently, when prescient backing by the Small Enterprise Assistance Fund (SEAF) and the United States Agency for International Development (USAID) in 2004 demonstrated their bullish potential.

USAID and SEAF joined forces to mobilize investments in small, fast-growing businesses at a time when SMEs had a “high risk” reputation. They were untapped by Indian banks and financial institutions. USAID’s support of $5 million including substantial equity participation in the Fund, combined with SEAF’s international experience building businesses in emerging economies, sparked the interest of financiers to eventually generate a $160 million “India Growth Fund” – a pool that well exceeded expectations.

Kotak Mahindra, a rapidly growing and leading commercial bank in India, entered the private equity market for the first time when it joined the public-private partnership as a key investor and fund manager. Speaking on the day of the fund’s launch, Uday Kotak, executive vice-chairman and managing director of the bank, said: “The India Growth Fund is the right product at the right time in the right market.”

The success of the partnership is “the sum of its parts,” according to Nitin Deshmukh, head of private equity for Kotak Mahindra Bank. “It is a marriage of commercial expectations and development interest,” he said.

“The investment philosophy of the bank is to invest in entrepreneurs who will be the leaders of tomorrow,” said Deshmukh.

“SEAF provides the technical assistance – the added value of business development for each early-stage company – that is the differentiating factor for achieving potential,” he explained.

USAID facilitated the fund’s entry into the Indian market, according to Deshmukh: “SEAF was an unknown in India. USAID’s backing and presence as an equity partner gave the venture credibility and a start to attract high-level Indian institutions.

“USAID started the momentum by creating a comfort level in a high-risk market,” said Mandakini Raina, deputy director general for SEAF in India.

Dr. K.K. Narayan, Chief Managing Director of Metahelix, a biotech company in which the India Growth Fund has invested, is working to promote the adoption of technology in Indian agriculture. Photo Credit: www.biospectrumindia.com

SEAF and USAID had a common interest to fuel growth “in the middle,” she explained. “Targeting high-growth sectors such as manufacturing, agricultural biotech and other industries made sense to both of us.”

Technical assistance to companies, funded by USAID and delivered by SEAF, is site-specific: “We take a personal approach to get smaller companies what they need to grow,” said Raina.

Services include business and marketing planning, linking to international expertise for product development, exploring foreign markets to boost expansion, and developing human resources programs.

“We never force the notion of corporate responsibility, but we actively encourage young companies to think about employee benefits, sound environmental business practices, and creating a work culture that is progressive,” said Raina.

“Today, every company with fund investments is a high performer, all have beaten economic forecasts, and each makes significant social investments in their workforce and communities,” she said.

As of March 2008, the fund has drawn down about 90 percent of the total investments, with thirteen companies in its portfolio and two more enterprises under due diligence.

The average increase in employee jobs created by growth, across the board, is 72 percent.

“After 18 months of venture capital investments, value is up for all companies, and a few enterprises may be ready for public listing in another 18 to 24 months,” said Deshmukh.

“Our investments will attract future investments. USAID achieved its objective and helped to create a sustainable, thriving venture capital climate for SMEs in India,” he said.

A few examples of success:

Sabare, a home textiles business started in 1991, is flourishing with the fund’s investments and technical assistance. It now supplies products in nine foreign countries and expanded its international presence by opening manufacturing operations in the U.S. and China, in addition to its original plant in India. It has more than doubled its workforce from 800 employees in 2005 to more than 2000 employees today. At its India operation in Karur in south India it provides a strong employee salary and benefits package, boarding facilities for its employees from distant villages, and schooling for workers’ children.

Metahelix, an agricultural biotech company, is developing home-grown Indian seed varieties and new technologies for farmers. It is close to launching the first Indian Bt + cotton seed on the market, with a price tag that is expected to be 40 percent less than what is available on the market today. It is looking to export its products to underserved agricultural markets in Vietnam and Bangladesh.