Investment Thesis: Paul Asel (IFC)

Below is an interview with a long time friend, Paul Asel, who now works for the IFC’s venture investment arm. I worked with him a fair bit when he was at Telos.

Paul’s Background

Paul Asel is a Principal Investment Officer at the International Finance Corporation (IFC), the private sector arm of the World Bank, where he is responsible for investments in early and growth stage technology companies in companies in emerging markets with a primary focus on India. IFC has actively invested in emerging markets for 50 years and currently is investing over US$6 billion annually across over 75 countries in which it has a presence. Paul’s current investments include IBS Group in Russia and DQ Entertainment, iLabs Group, Indecomm, KPIT Cummins, Newpath Ventures, Nevis Networks and Spryance in India.

Paul has been an active global early stage investor for over 15 years. Prior to IFC, he was a General Partner at Telos Venture Partners, a Silicon Valley venture firm, where he focused on enterprise software companies. Earlier he was Senior Vice President at Delta Capital, a $340 million private equity firm in Russia, where he launched Russia’s first successful consumer finance bank, leasing and mortgage operations. He began his career with Merrill Lynch in corporate finance and mergers and acquisitions.

SM: IFC has a long experience investing in India and you have been investing in some interesting markets over the last 15 years. What is your perspective on the current investment environment in India?

PA: It is a good time to have invested. Our companies have averaged growth of more than 50% per year since our initial investment and valuation multiples have risen by 25-50% in the last four years.

We recently reviewed our investment performance over the last 15 years and noted steady improvement as annual GDP growth has accelerated from 4% to 8% and the range of investable industries have both deepened and broadened.

Emerging market investing is more volatile than in the U.S. as markets are thin and changes in the supply of capital dramatically alter the investment environment. The impact of the Internet boom/bust cycle on investment was severe in Silicon Valley but even more pronounced in India. Elsewhere, the Russian market fell by 90% following the economic crisis in East Asia in 1997 and countries such as Thailand are only now recovering.

SM: What are your expectations for technology investing in India in the next 2-5 years?

PA: We are optimistic about prospects for India. We believe that India is on a long term high growth path that is sustainable for the next 20 years and are looking at opportunities that will benefit from this growth trend.

At the same time, we are cautious on valuations. There are now 120 venture and private equity firms investing in India. Most have entered India in the last two years so we are seeing a rapid escalation in prices. Infosys and Wipro have achieved earnings growth of 40% per year for the last four years but are only now returning to their 2000 valuation levels. The challenge will be to dig deeper to find hidden gems at valuations that stand the test of time over a 5-7 year period.

SM: Where do you hope to find the hidden gems?

PA: IFC’s mandate requires us to think carefully about the role we play in each investment. Our investments are designed to complement rather than compete with other investors, so we need to be more selective in the current environment.

First we look where our value add is strongest based on our network, domain expertise and portfolio companies. We have done well in telecoms across emerging markets in the last 15 years and invest over $2 billion per year in banks and financial institutions, so we look for technology and IT services that would like to sell globally into those markets.

We also look for investments that are under the radar. With three offices in India, we look for good companies that are off the beaten track. We also focus on technologies that extend services to underserved markets, particularly rural markets in India or global emerging markets. Finally, we have made several seed stage investments such as Drishtee, a small but growing Internet kiosk company, in which we may be a long term financing partner as the company expands.

SM: What types of investments do you make?

PA: IFC has the flexibility to arrange debt and equity financing depending on the needs of the company. Our investments range from $2 to $30 million or more. We focus on equity investments for early stage companies and combinations of debt and equity for growth stage companies.

IFC is a long-term investor and we seek to invest in companies that have the potential to be long term leaders in their markets. In India, for example, we were early investors in Bharti, Jet Airways, HDFC, IDFC, Moser Baer, and Gujarat Ambuja. We are an evergreen fund without a specific end of life, so there is no pressure to exit an investment within a specific timeframe. Also in South Asia, we initially invested in Grameen Phone, the leading wireless operator in Bangladesh, in 1997. We remain an investor and completed a large follow-on financing for the company this year.

SM: Describe your ideal entrepreneur.

PA: Like most investors, I look for entrepreneurs who eat nails for breakfast, have deep domain experience in their target market, and have a track record of success. I care a lot about entrepreneurial integrity and a commitment to continuous learning. I invest in people more than a plan. Our companies compete in volatile, uncertain markets. Integrity and adaptability are essential traits to sustain an entrepreneur along the bumpy, winding path to success.

SM: 120 firms investing in India makes it a tough climate, one that is probably going to send some serious jitters of frustration in the investor community. It would be interesting to track over the next five years, which of these firms end up as front-runners!

This segment is a part in the series : Investment Thesis