Singapore-based DSG Consumer Partners, one of the rare non-tech early stage investment firms, recently hit the first close of its second fund at $35 million, with a target of raising $40 million. The India and Southeast Asia-focussed fund has already started deploying its second fund, with its maiden investment in juice brand Raw Pressery in a $4.5-million funding round along with Sequoia Capital and Saama Capital. It is ready to close four more investments, two of which are likely to be announced by June, Deepak Shahdadpuri, Founder and Managing Director, DSG Consumer Partners said in an interaction. Armed with a strong financial investment background spanning over 15 years, Shahdadpuri had earlier founded investment firms including InseadAlum Ventures, Beacon India Private Equity Fund, Gem India Advisors and Capco Advisors. He currently serves on the boards of Baker’s Circle, Bhayana Builders, Exito Gourmet, Indostar Capital Finance, Mswipe Technologies, Sula Wines and Veeba Food Services among others.
What is the total amount that you plan to raise for the second fund?
We have a target for $40 million, with a hard cap of $50 million. We are very clear about our strategy, where we are able to deploy huge amounts of money. Its a repeatable strategy. Our first fund was $14 million, which has played out well, and we think we can deploy around $40-50 million every three to four years.
So, we started fund raising on January 8 (2016) in Singapore, Hong Kong, Europe and then the US. We were able to get the first close within 12 weeks, partly driven by the strong commitment of existing investors, who represent about 40 per cent of the $35 million, while 60 per cent has come in from new investors.
By when do you think you will be able to raise the remaining amount of the fund?
We are not actively marketing, so we are not sure. Different investors have a different timeline and diligence process. A number of investors who are new to the fund have been tracking me for over a year. I wasn’t a new person to them, but they hadn’t invested in the last fund. They were probably quicker off the block, because it wasn’t diligence from scratch. There’s another group of investors who haven’t met me yet and they are doing their diligence. Quite a few of them are still reviewing where we are. I want to finish up by June for sure. I expect to get the $40 million very comfortably just based on where people are. Whether we get from $40 million to $50 million, I haven’t spent too much time thinking about it.
Who are the investors that have come into this round?
Verlinvest – the Belgian family office – is probably the most visible investor. They’ve co-invested with me in Sula. Although this is the first time in this fund, I’ve known them for a very ling time. In addition to that we have a large French family office, based out of New York, then we have a Singapore-based family office and ACPI, a UK based fund manager. Then we have people who have agreed to come in their individual capacity, including the two founders of Saama Capital. Everstone has come in their institutional capacity, Sameer (Co-founder Sameer Sain) was there was an investor in Fund I. There are also a lot of Bain Partners who’ve come into the fund as well.
Of the total $35 million in the fund, $20 million has come from the four big investors—Verlinvest, the Singapore family office, the French family office and ACPI—who have come in with $5 million each and they are as focussed to co-invest with me.
What is your strategy for deployment of the fund?
It’s going to be identical as Fund I, which is early stage, and we will be very happy to do greenfield. We focus on seed and Series A. The strategy is to do seed and put in enough capital for 12-18 months to develop the product and test the product market fit. From the 21 investments that we have done from the first fund, the average size for the first cheque has been $100,000-$2 million. If it is scalable then we plan Series A, Series B, Series C and we usually in most circumstances participate in each of the rounds going forward up to a cap of $5 million per company.
The only change between Fund I and Fund II is that in fund I we saw that some of the companies have become very successful and Series B and Series C have become very large and given the size of the fund we may not be able to do the Series C’s and Series D because our pro-rata may be $10-15 million. That is why some of the larger institutional investors have agreed to back the fund.
Verlinvest has put in as much weight as the opportunity to co-invest as they have in wanting to back me as a fund manager, because they have done a lot of deals with me, they love consumer businesses, but their minimum investment is $15-20 million. Their view is for us to go and build the business and invest in Series A,B and C, but series D comes in then they can co invest with us.
So while my investor strategy has not changed, my investor bets have changed where once I cross Series C, I will still have access to capital, who can then selectively invest in companies.
When did you exhaust Fund I?
We will continue to make follow on investments, but we stopped making new investments from the fund on December 31, 2015.
Which are the sectors that you are keen on investing in?
I like to do sectors that no one is actively hungry about. When I was doing alco-bev and wine, people thought I was mad. When I did art in 2000, people thought it was confusing, couldn’t see an exit strategy. So I will look at consumer more generically. But, where I spend more of my hours is food processing, because that is a sector I understand well and I actively go and start up businesses or promoters find me. Also alco-bev I get to see a lot maybe because of my involvement with Sula and building it from scratch.
I also spend a lot of time in financial services, because I think that’s an industry in India and Southeast Asia which is ripe for disruption.Technology is allowing people to do a lot more things. Fund I had MSwipe and India Lends, I think Fund II would probably double that to around four.
I also spend time on health and wellness, which will be huge in the next ten years. Fund I had GOQII, and now actively looking at this space.
Do you see the ratio of investment in various sectors changing and tilting away from food processing and alco-bev?
Food services will continue to be a large chunk, maybe 25 per cent, financial services will be about 15-20 per cent, alco-bev I’m trying to find the right promoter or right strategy or right model. But, in my past 15 years of experience, I have realised that the best opportunity comes in a sector, which I haven’t even thought of today. You find a promoter, who is trying to solve a problem, for which you don’t even know the market size, but they are interesting. You really can’t plan those, so every fund will have one or two of those.
So, of the 21 investments in Fund I, food processing and food services accounted for 10, meaning almost half. Going forward, I think food services may come down to a third. There are companies like Raw Pressery, which comes under wellness, food processing and food services. So you can’t predict an exact number.
Is there any particular geography that you’re interested in?
Fund I was in India, Singapore and Indonesia. Fund II will also be the same, the mandate is India and Southeast Asia. Within Southeast Asia I am based in Singapore, so it’s a market I know very well, so that’s going to be one area. Of the next four deals, two will be in Singapore, although both have regional ambitions but they are headquartered here. I think two-thirds will continue to be India and the remaining third will be Singapore and Southeast Asia, but I’m very open minded about these.
In Southeast Asia, each of the markets are very interesting, but I know where my strengths are. Singapore, its my country I grew up there. After Singapore the most likely geographies might be Malaysia or Indonesia because I used to work in Indonesia, I’m fluent in the language and I’ve already done a deal there. Other Southeast Asian markets I’m not hunting actively, but if there is a local partner who wants to tap me for their India experience. In countries I don’t know well I’ll only go into sectors I know well.
How do you see 2016 panning out for you?
We have made one investment in Raw Pressary. We are actively working on four other deals. One is in the transport sector, one is in the wellness skincare sector, one is in the real estate brokerage sector. Its early days, but we will announce our next deal, end of May. One or two of the four we’ll announce by the end of May.
How many investments will the second fund approximately make?
Maybe about 20 in the second fund. The strategy will be the same, where the first cheque will be around $500,000-1 million on an average. In Fund I, the average across 21 deals was $700,000. So if you apply the same, then $700,000 means $14 million will go into the 20 companies. The bottom five of the portfolio I don’t expect to put any more money in, I’ll probably sell and get out. The middle 10 I think are interesting and will make us 2-5 times the money, and according to my pro-rata, will take another $10 million. And then the remaining $10-15 million will be for the top 5, which actually drive the returns of funds. If you look at Fund I, it is clear to me that MSwipe will be a significant player in its space, it already is. Also Veeba is going to be a significant player in its space. Those two have clearly broken out in their areas, who could be the super breakout I don’t know, it could be India Lends, Easy Diner.
How do you assess the investment environment right now?
Right now people are not as quick to commit, people are absolutely more cautious. If you ask them why they are more cautious they are not able to give you a very clear reason. They think why should they not wait, interest rates have gone up, people are more nervous. Few of my LPs said had you come in September or October, there was a fear of missing out. Now there is a fear of getting in. They don’t want to go in early.
I started investing in 1999, so around 15 years, and this is probably the third cycle I’ve been through, and in my view this will be one of the better vintages. People are nervous, “me too” companies or undeserving companies will not be funded. Investors have become selective.
The valuation at the seed level was never crazy, but the step up from seed to Series A was very large, and that is not going to change. There is a lot for funds in the mid market where they invest $20-30 million. Very few funds are there who are happy to write the Rs 3 crore, or Rs 6 crore cheques so that gives me an advantage. My real competition is with angels, because they are more flexible, and I’m competing with firms like Blume Ventures and Kae Capital, in which I’m an investor, but these firms historically have been technology focussed investors.
How do you view competition from angel investors?
It is both positive and negative. Angel investors are key to the ecosystem at the macro level, I think they bring a lot of value if they are the right angel investors, where I think where it is broken in India is where people are looking at this as a safe haven. It’s very high risk, most people should not be angel investors. Angel investors should be the ones who understand the risks, who have built their own businesses, who want to share their experience and knowledge, who can add value. This will be a big blowup, those who don’t know what they are investing in, will lose a lot of money.
It’s a good signal, when I see good angels invested in companies that I invest in.
How do you view growth in the FMCG space?
Its a very interesting space and brands are going to be created quicker than they were few years ago. Sula took us a lot of time to create, Veeba took shorter. You are going to see some brands being created very very quickly because media has changed, channels have changed, the world has shrunk there is clearly more demand for consumer brands, retailers want to have a wider portfolio of products. A lot of macro and micro points have now come together, which has now given the Indian consumer what he wants, the consumer calls the shots.
A lot of people are seeing that play out, because there have been a lot of acquisitions and a lot of exits. I’ve have four exits in Sula and each exit is much bigger than the other, because the company is growing. If you can grow the brand then there will be not one or two but even four or five buyers queuing to buy you, and we know who the buyers are, because the global FMCG players are coming in, the big Indian companies the Godrejs’ and HULs are willing to buy.
All these companies over the last two decades have a track record of buying brands globally. Now they are showing the same strategy in India.
So, is now a good time for M&As and exits?
It’s never a good or bad time , if you take the company to a stage where you think you need to be acquired. At Sula we have this discussion every year, because there are a lot of parties wanting to buy us but the company is still growing very nicely. What has changed is the strategics or aggressiveness to buy a company. Earlier we used to have some casual interest in Sula and some other companies, now it has become much more obvious, I don’t know what has changed, but the big global brands want to acquire Indian assets if you’re the market leader, or have distribution, or have a brand that they can leverage. It is very clear that the consumer is spending, which will only go up. Brands will get created, and there will be a huge appetite to buy them.