In new economy sectors, we aren’t going to spray and pray: ChrysCap’s Shroff

ChrysCapital managing partner Kunal Shroff. Photo: Abhijit Bhatlekar/ Mint

ChrysCapital, one of India’s largest home-grown private equity firms, is scouting for deals in the new economy sector, said the firm’s co-founder and managing partner Kunal Shroff.

This is even as the firm has so far stayed away from investments in the sector. “In the last three years, we’ve spent a lot of time on the new economy. It’s just too important for us to ignore. We just haven’t ended up deploying a lot of capital,” said Shroff, at the DealStreetAsia PE-VC Summit 2020 during a fireside chat – The art and science of fundraising and investing in a crisis and scoring exits in India.

“On the new economy, our view is that we are generally not going to spray and pray. We don’t want to have a large portfolio of companies where we are taking a bet and hoping one of them becomes a Google.” Instead, ChrysCapital, he said, is looking to “make doubles and triples [returns] on each investment.”

Given that the sector is typically tapped by venture capitalists, ChrysCapital is not looking at investing in early stages in startups – be it Series A or Series B – but is instead looking at companies that are already showing signs of profitability.

“We’re going to play at a much later stage than a typical VC will enter….we’re not looking at it (an investment) from the alphabet standpoint. We’re looking at it from a company standpoint. So, if you’re a company that is already profitable, and now because of corporate overheads, your EBITDA is negative and we have a path to see X amount of growth, the same margin, I’m getting to profitability, it would be something we would look at.”

ChrysCapital, established in 1999, has seen a spate of investments and exits over the past few years, which in a typical PE parlance is called a successful investment cycle. Over the years, the firm has seen the dotcom bust in 2000, the global financial meltdown in 2008-2009 and now yet another crisis emerging from the COVID-19 pandemic.

“India is more affected this time than last time (2008-09), actually. Last time, it kind of passed us by. But this time, there are sectors, there are jobs at stake. Job creation was a problem pre-COVID. It is becoming worse with this (pandemic) issue,” said Shroff.

In 2010, a year or two after the economic meltdown struck India, ChrysCapital had returned about $300 million from its $1.15-billion Fund V to its limited partners (LPs).

“The reason for us to do that in 2010, was we were seeing the opportunity set for us not as attractive, where we would consistently deploy that. The world had changed,” said Shroff.  “This time around when we look at the scenario, our fund size is actually slightly smaller than where fund five was 10 years ago. And the opportunity set actually has expanded pretty significantly, even before COVID.”

ChrysCapital made headlines early last year when it raised $850 million for its eighth fund to deploy capital in four key areas that it has so far been investing in – financial services, healthcare, business services, and consumer.

The firm has so far exhausted one-fourth of the total corpus of the said fund. It has about $4 billion of assets under management (AUM) spread across eight funds.

Are GPs adopting a wait and watch policy?

Given that India is staring at its worst recession with several sectors reeling under the pressures of the pandemic, Shroff indicated that risk capital investors are taking a cautious approach towards new investments.

“I would say they are taking a cautious, but they’re doing a calibrated approach. I think in sectors where they have had success, they’re being aggressive. In sectors that are newer to them, they’re prioritising, and saying, look, I might as well back the existing known name.”

India’s economy contracted 7.5 per cent in the July-September quarter, showed data released by the National Statistical Office (NSO). In November, however, the Central Bank in India (RBI) predicted that the economy will contract by 8.6 per cent in the said quarter.

“The pandemic is out of control in certain situations, and it has caused a lot of damage, not just economically, but lives, healthcare, a variety of different factors…..India has had a very, long lockdown and a pretty strict one. And while we are still in some unlock phase, a lot of the services, a lot of the activity is still not back to levels. So, it is a pretty serious economic impact.”

Opportunities in the wake of the pandemic

“India always has had potential. And it has demonstrated it,” said Shroff. “The potential is not just about the size of the population or the potential middle class in India, but it has to do with where we are in the penetration of certain goods and services. overall, I think the opportunity set, if you have a long enough view, is quite strong.”

September was an exceptional month for fundraising as mega-deals helped push up the scorecard led by edtech major Byju’s and a spate of private equity transactions. While digitally-backed businesses in the new economy sectors particularly in sectors such as healthcare and edtech continued to evince significant investor interest, the highlight of the PE space was billionaire Mukesh Ambani’s firm Reliance Jio that attracted capital in hordes from foreign investors.

“Yes, there was a lot of interest in the Reliance deal. There is a lot of interest in certain new economy sectors. We’ve seen that play out in the past also. So I think sectors will move up and down. But the potential is definitely there,” said Shroff. “And it’s not just about the size of the population or the potential middle class in India, but it has to do with where we are in the penetration of certain goods and services.”

Impact of the India-China standoff on investments

During the first nine months of this calendar year, Chinese investors pumped in about $1.2 billion, a significant drop from $2.9 billion invested in the same period last year, shows data available with research firm Venture Intelligence.

The total amount invested by Chinese investors in India last year stood at $4.4 billion. In 2018 and 2017, they pumped in $4.1 billion and $3.4 billion, respectively.

“Overall, China is way bigger than India. And India as a proportion of Chinese trade is 1-2 per cent. So, without India, China can continue to do what they’re doing. For us, China is still a bigger percentage; it will be 5-6 per cent of trade for us. And so obviously, the impact of China on India is more than the impact of India on China,” said Shroff. “But, there will be political distractions, and there will be the economics at the end of the day,” he added, highlighting how the bigger issue that “everybody is talking about is US-China.”

If the US is looking for de-risking or finding a second source, which are the countries that benefit from it? “I think India has done a poor job of capturing that. One is our mix is different from what China exports. So it’s not easy for us to step in,” said Shroff.

 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.