Betting on the Indian entrepreneurial story, Dubai-based Legatum, the multi-billion dollar-global fund, is closely tapping health, education and energy for future investments in India. Having invested over $1billion in India’s financial services sector since 2005, including marquee investments in banks such as ICICI, HDFC and Axis and in the MFI space with SHARE Microfin and Intellecap, Legatum is looking to expand its investment portfolio beyond the financial services domain. Even as Phillip Vassiliou, managing director, Legatum, confirms that the fund has exited it’s investments in the banks, it will remain invested in SHARE Microfin and in Intellecap, a social investment advisory business that helps them source ventures for social investment. Vassiliou tells FE’s Sarika Malhotra that India will have a lot of entrepreneurs working not just in the MFI space but in health, education and energy, where there is a real opportunity for businesses to cater to the needs of the poor on a scalable and sustainable league. ?As long-term investors who promote sustainable human development we are identifying businesses in these fields actively.?

Legatum has exited its investments in ICICI, HDFC and Axis, will you be investing in the banking space again? And what is keeping Legatum off the banking sphere?

A significant part of our initial investments were made in Indian banks. From the capital markets side, we found opportunities elsewhere in the last couple of years. It is less a reflection of where India was going and more a reflection of avenues elsewhere, particularly, with respect to valuations. Valuations around 2008 became very stretched in India, especially in the financial services sector and we started to look at other geographies. The quality of management and operations of Indian banks is world class, we retain good friendship with the management teams and keep a close eye at the banking segment from an investment interest. I must affirm that it?s a sector that we have closely followed and is of immense interest to us and we will be investing in it again sometime soon.

Are there any concerns about investing in the sector, given the growth slowdown, non-performing loans and prevailing macro-economic environment?

Our concern stems from the experiences coming out of our investment in SHARE and the microfinance sector.

How do non-performing loans originate?

On one hand there is a hue around credit risk and how and who banks are lending to, on the other side, there is also an issue around regulatory risks. And that is probably an issue that came to light in the last year or so that there is a regulatory risk to investing in India. It was evident from the Andhra Pradesh Act passed some18 months ago with almost $1.5-billion loans that the MFIs can’t service, and the money belongs to the large state and private banks.

The banks didn’t cause the problem, MFIs clearly had a role in the issue, but the regulatory concerns surely heightened the problem. If we look at the framework of the entire banking sector, our cause for concern right now stems more from the evolution of the regulatory framework than from specific credit risk and the manner in which the banks are running their portfolios. We had substantial plans to invest in Indian MFIs but the plans are on hold owing to the regulatory environment.

With SKS Microfinance coming with an IPO and its subsequent performance, how do you rate the practice of MFIs raising money from the capital market?

It’s obviously a contentious issue. However, we have to step back and look at the broader issue of 450 million unbanked people and what is the way to best provide financial services to those people. Our reasoning is that there is a role for three channels ? the private sector, state sponsored programmes and charity. From experience, the best, most sustainable and scalable way is through the private sector, and significant equity capital is required to enable that. The most efficient and cheapest way to source that capital is through the private equity and ultimately public equity markets. SKS IPO was test case in seeing how an organisation evolves from an NGO, to raising significant PE capital, to raising significant public equity and at the same time serving the poor. Through SKS the sector could have demonstrated that it could have been the best model to provide financial access to the poor and changing lives of the people even through a profit component. There has to be a profit component for MFIs to be sustainable and scalable and demonstrate the double bottom line to the stakeholders that they are changing lives of the poor at the same go. It’s a delicate balance to get right. SKS IPO came at a time when the industry was not ready to support that kind of an issue.

And since the IPO the AP legislation came and that has significantly impaired SKS as has other MFIs that have AP exposure.