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Venus Capital offers access to India growth story

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Vik Mehrotra (pictured), CEO and CIO of USD300 million Venus Capital Management, is, along with Narendra Modi, Prime Minister of India, confident that the 21st century belongs to India.

Mehrotra’s firm was founded over 20 years ago and was the first hedge fund focused on arbitrage and relative value opportunities in India. The firm has spent the last three and a half years focusing on direct lending to SME enterprises.

Venus Capital Management invests through a British Virgin Islands fund in a non-bank finance company (NBFC) in India, regulated by the Reserve Bank of India and offering an alternative route to lending. The investment comes through a subsidiary based in Mauritius.

“Venus is all about local execution,” Mehrotra says. The NBFC has a team of 30 people based in New Delhi, while Venus Capital Management has offices in Boston.

“The analysts scout for deals,” he says. “Most are self-generated but some come through bankers and brokers or friendly NBFCs who want to co-invest with us for reasons of exposure limits. Analytical work is done by the analysts and then the NBFC CEO looks at everything and it then comes to the investment committee and we have to unanimously agree before we invest.”

Venus is agnostic as to the industries or sectors in which it invests. “What we have noticed is that real estate dominates at 24 per cent and then IT is 22 per cent and after that we have restaurants, logistics and consumer goods.”

The portfolio is quite diversified across 46 holdings and about 100 loans made over the last three and a half years. In that time, there has been only one delayed loan of about USD600,000 which is proving to be a non-performing asset but with enough collateral to recover it.

In terms of performance, the operating company value has appreciated by 19 per cent per annum since June 2013. Investors will be able to sell their shares through the Mauritian subsidiary when the operating company goes public, with an IPO planned within the next two years, with a listing on the National Stock Exchange of India and the Bombay Stock Exchange.

“I think India is a domestic consumption story,” Mehrotra says. “It’s a young country with 50 per cent of the population aged under 25 and the consumption boom comes as incomes are rising and will continue to fuel the economy quite well with a demand not just for consumer goods but also for homes, cars, you name it. However, despite the spending, Indians save about 30 per cent of their salaries.”

Real estate dominates the portfolio because it is a sector that is asset rich but cash flow poor. Venus requires collateral of two and a half times of what they lend, so for every 100 Indian rupees lent, they need 250 Indian rupees in collateral.

They manage the book at a 40-50 per cent loan to value ratio and people are increasingly using collateral such as real estate to kick start their new projects. Mehrotra says: “This is one of the most risk averse or conservative strategies where you can control the downside risk, where you are participating in the growth of the economy but you are protected in the downturn by the collateral. It means you get equity style returns with much lower volatility.”

The weighted average lending rate is around 16 per cent. “If you can lend at 16 per cent with a lot of collateral why take stock-market risk which has done 14.5 per cent per year on average since 1991?” Mehrotra says.

Investors in his lending fund are primarily corporate pension plans, family offices, private equity investors and some sovereign funds, from the US and Europe.
 

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