The potential positive economic impact of investment bubbles

From the tulip mania in the 17th century to the global financial crisis of the last decade, investment bubbles can have devastating consequences such as economic recessions and job losses. But there have been instances where financial bubbles have had long-lasting positive economic impact.

For instance, the tech bubble in the late 90’s resulted in significant investment in global telecommunication infrastructure. While the resulting overcapacity resulted in massive losses for the companies that installed the fibre, the lower cost of data communications made the internet more accessible for billions of new users.

During the same era, flameouts such as Pets.com and Webvan served as examples of the excesses of the dotcom bubble. However, internet pioneers including Google and Paypal were also spawned during the same period. More recently, the investment boom in shale oil in the US resulted in several bankruptcies but also made the country energy independent and its manufacturing industry more competitive.

In India, over the last few years, the level of activity in early stage investing in consumer internet businesses has increased significantly. The rich valuations secured by companies with questionable business models and no hope of future profits has generated comparisons to the dotcom area. For instance, more than a dozen so called food-tech companies have received institutional funding over the last two years. More than half of these companies have since disappeared along with the investors’ capital. Similar excesses have occurred in e-commerce and the so-called sharing economy.

But there is an upside. While a majority of these new-age businesses will fail, a handful of winners will emerge as sustainable enterprises, create jobs and generate attractive returns for investors. Some of these new businesses are already changing consumer behaviour and improving lives. Residents of small towns in India do not have to travel several hundred miles to purchase a book of their choice or buy the latest fashion products. Residents of big cities don’t need to brave the traffic or deal with parking when buying groceries or clothes. It is all delivered to your doorstep with just one click. These innovative online businesses are also forcing the traditional retailers to up their game, and improve their selection and price. Regardless of who wins the e-commerce wars, the real winner is the Indian consumer.

My hope and wish is that the ambitious entrepreneurs and VC/PE investors will develop businesses outside the e-commerce and tech sectors. While we may not need more hotel aggregators or marketplaces, we do need better primary education, modern agriculture techniques and better roads. We need to deliver better healthcare to rural India.

There are some promising signs. The success of micro finance is spawning new rural finance businesses in areas such as agriculture and SME finance. These new-age financial services business are nimble and more innovative than banks and are providing credit to previously unbanked customers. New and innovative business models are also emerging in the agriculture sector, where intrepid entrepreneurs are disrupting inefficient supply chains and delivering high quality agricultural inputs to farms. The beneficiaries are the Indian farmer and the Indian consumer.

I hope that mini bubbles will emerge across these underserved sectors, and the young women entrepreneurs of India will not just copy Amazon and Uber, but build business models that solve India’s real problems.

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For Indian entrepreneurs, the big opportunity is at home

A focus on the domestic market will also protect Indian businesses against future global economic crises,which may reoccur due to high debt levels and zero-interest monetary regimes

Globalization has been on the ascent since the collapse of the Berlin Wall, with the free flow of trade and capital benefiting both the developing and the developed world. India has more than tripled its per capita income since joining the global economy in 1991. Within a decade and a half of joining the World Trade Organization (WTO), China has transformed itself into a global power.

As a result of lower trade barriers, consumers in advanced economies enjoy low-price goods and a higher standard of living.The companies in the S&P 500, the index of leading American firms, now generate close to half their sales from overseas markets. However, since the global financial crisis, support for globalization is declining in the western world. Much of the gains from trade have been secured by the skilled and highly educated while middle-class wages have stagnated and the number of low-skilled jobs have declined, creating significant political backlash.

This blow-back is exemplified by Brexit, the rise of nationalist parties in Germany and France, and the emergence of Donald Trump as a major party nominee for president in the US. Indian businesses have gained significantly from globalization and needs access to foreign capital as well as global markets. So what could be India’s role in this challenging environment? India needs to expand its focus beyond the contentious issue of agri-market access, and attempt to facilitate ongoing reduction of tariff and non-tariff barriers in the Doha round discussions.

It must build free-trade agreements across its neighborhood in Asia, either bilaterally or participate in multilateral regional trade agreements that support market access and protect investor rights. Market access is critical for services and IP oriented businesses across sectors such as IT, pharmaceuticals and engineering services.The jobs of tomorrow are in urban clusters and not in the countryside. Indian trade negotiators need to represent the interests of both farmers and entrepreneurs in global trade forums.

World markets do not have the capacity to absorb another China-size exporter of low-cost manufactured goods. Perhaps, Indian entrepreneurs can look at Germany as a role model. Germany, with a population of 80 million and one of the highest per-unit labor costs, is one of the world’s largest exporters.

The country has achieved this success on the back of its Mittelstand, the dynamic SME sector, that produces high-quality goods and is more flexible and customer-centric than large western conglomerates. Indian mid-sized businesses can learn from this model of intense training and commitment to quality. Indian businesses have the opportunities to become world leaders in areas such as medical tourism, speciality chemicals, and auto and aviation components. However, for Indian entrepreneurs, the big opportunity is at home. A focus on the domestic market will also protect Indian businesses against future global economic crises, which may reoccur due to high debt levels and zero-interest monetary regimes across the developed world. Across sectors such as consumer goods, healthcare or education, the trillion-dollar opportunities exist within India.

The policy prescriptions are well known to Indian policy makers -improve infrastructure, reduce red tape and reform education. There are some encouraging signs that the government is gingerly moving forward on reforming these areas. Now it is up to the Indian entrepreneur to make the best of it.

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Fintech startup MPOWER Financing raises $6 mn

fundWashington DC and Bangalore-based fintech company MPOWER Financing, which facilitates funding solutions for international students pursuing higher education in the US universities, has raised $6 million (nearly Rs40 crore) in funding. The round was led by private equity firm Zephyr Peacock India.

Other investors including University Ventures, 1776 Ventures, Goal Structured Solutions, VilCap Investments and Fresco Capital also participated in the funding round, according to a statement issued by MPOWER and Zephyr Peacock on Wednesday.

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Lanka can easily be a regional economic champion – Thomas C. Barry

Sri Lanka can easily be a regional economic champion and there is no reason why the island cannot be another Singapore soon, Zephyr Management USA, President and Chief Executive Officer Thomas C. Barry said.

Speaking at an event in NDB bank yesterday, Barry who created this investment management company in 1994 said that one of the biggest advantages Sri Lanka has in addition to its location is that the island is friendly with all the other neighbouring countries. “With the change of governments both India and Sri Lanka too enjoy very close bi-lateral relations.

He said that he feels that SME sector will be one key area that will take Sri Lanka to the next level and they tied up with the Emerald Fund to support this sector.

“The Emerald Sri Lanka Fund will invest in small and mid-sized businesses seeking expansion capital in Sri Lanka.”

He said that Intra Asia trade is the fastest growing segment in the world and this too is another plus point that will help Sri Lanka to be another Singapore as the country maintains good relations with future economic giants, China and India.

Barry also said that the proposed plan to set up an international financial centre is a step taken in the right direction towards taking the country to be another Singapore.

He also said that peace dividend Sri Lanka enjoys too will help the country to be major tourist destinations. “It will be a shame if Sri Lanka cannot be the ‘Best tourist destination in the world’ in five years.”

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Zephyr Peacock: Pennar Engineered Building Systems (PEBS Pennar) completes initial public offering (IPO) on the stock exchanges in India

Zephyr Peacock India Update

Zephyr Peacock India Annual Meeting 2016

On July 28, the Zephyr Peacock India Funds Annual Investor Meeting will be held in New York City. If you would like information or a copy of the presentation, please contact us.

Zephyr Peacock India Update: New Investment in Affordable Housing Finance

We are pleased to announce that Zephyr Peacock India Fund III has invested in an affordable housing finance company, Swarna Pragati.

Zephyr Peacock India Fund III completed a US$ 5 million investment in Swarna Pragati Housing Microfinance Private Limited. The Company is headquartered in Chennai and provides housing finance to rural households. The Company began operations in 2011 and is managed by a team of experienced executives from the Indian banking industry.

fund-peacock-swarna-pragatiThe total stock of housing loans in India is just 7% of GDP, compared to 80% in the developed markets. The gap is even larger for rural home loans, as banks and traditional home finance companies do not lend to this segment since conventional means of credit assessment such as analysis of salary records and credit bureau checks are not useful in rural areas where a majority of the population is employed in agriculture or other informal employment.

Swarna Pragati is only one of two companies operating in the vast rural home finance market. Swarna Pragati has a deep understanding of its customer base in partnerships with microfinance firms who have long relationships with rural customers.

As the housing finance market expands, Zephyr Peacock is well positioned to participate in the growth with Swarna Pragati.

Zephyr Peacock provides a unique combination of an experienced on the ground investment team with a global network of long tenured emerging markets professionals who actively work with the companies to build and grow the company. Zephyr Peacock will be an active shareholder, providing Swarna Pragati with guidance to improve corporate governance, strengthen business processes and hire senior management. In addition, Zephyr Peacock will help the Company improve efficiency with the deployment of technology solutions.