India- and Southeast Asia-focused private equity firm Everstone, which is in process of raising $950 million for its fourth private equity fund, is looking to bet big on Indonesia’s healthcare sector in the next 5-7 years.
In the healthcare space, Everstone is already invested in Indonesia’s DV Medika, a medical supplier and manufacturer of hospital beds, through its platform Everlife.
“As the COVID-19 pandemic has exposed glaring gaps in medical infrastructure in most countries, we will enhance focus on Indonesia’s healthcare sector,” said Atul Kapur, co-founder and CIO of Everstone Group at DealStreetAsia Asia PE-VC Summit 2021, during a fireside chat titled – Strong capital structures, liquidity, and credit access key to navigate the crisis.
Elaborating on the strategy for SE Asia’s largest market, Kapur said, “our investments in Indonesia are based on two factors. We know the quick service restaurant (QSR) business there really well. It is a fabulous investment for us, and so is the medical device distribution business. Second, we can’t be private equity investment tourists and can’t jump in and out of Indonesia sitting in New York, Singapore or Mumbai. We need local partners to do what we want to do. It is unlikely we will go ahead in Indonesia just by ourselves.”
Everstone is also preparing for an exit from PT Sari Burger Indonesia (BK Indonesia), as Burger King India Ltd has expressed its intent to take over the fast-food chain’s Indonesia franchisee.
During the fireside chat, Kapur also touched upon India’s exit landscape, fundraising progress and milestones and outlook for real estate and renewable businesses.
In private equity, exit defines the business. Everstone has been riding on a slew of exits in 2020-2021, be it Modern Foods, Everise, BurgerKing India, or Ascent Health (PharmEasy). What’s the common thread here?
India for a long time period had an unfortunate track record of not returning capital to investors. People used to call it Hotel California, which one can check out but never leave. We decided about six years ago that in order to drive returns of capital and return on capital to investors, we need to think of exits almost as hard as we thought of investments. We then started weaving in exit thesis into our investment thesis. We built a line of sight as to who the potential buyer of the businesses could be.
We have laid down the roadmap from entry to exit for each investment and measured that in time. The 48-month hold period is the optimal hold period for any investment. Of course, we hold assets even longer sometimes, either for the right or wrong reasons when things are not working out. When things are working out fabulously, one gets a little greedy and wants to make more IRR. We have got both ends of the spectrum in our portfolio. Bringing focus on exits, writing and running that journey has got us to where we are today.
What’s the exit plan for your Indonesia food portfolios?
In Indonesia, we have two assets – Burger King and Domino’s. Both have done reasonably well through the pandemic. Burger King India, which is a listed company, has communicated both to the stock exchange and its shareholders that it is going to make a bid for Burger King Indonesia, and will end up providing exit to us and our partners in Indonesia. On the other hand, Dominos has transformed itself from a pizza company to a tech company during the pandemic and has capital. We have roughly 170 stores. We will continue to drive the growth of that business, and then look to exit, either to a sponsor or roll it up into a larger platform across Asia.
Looking at the IPO run in India, are they great companies or is it just the bull run? Do these companies that are coming to the market have a scarcity value?
Rising tides lift all boats. There is excess liquidity in the market and [a prevailing] low-interest-rate [regime]. One can see massive digital disruption in traditional industries. Unfortunately, in a bull run, markets are slightly indiscriminating, so everything floats as long as you have a sensible story, a good management team, and demonstrable numbers. If in a year or two interest rates rise, as they inevitably do, liquidity will start draining out of the markets, and you will see a sifting of the markets where great companies will trade well.
Despite the pandemic, more PE funds are being raised in India. There is record dry powder in India both from domestic as well as global firms. Deal numbers are up, transactions are being completed really quickly. What has really changed overall in India, and are exits coming through?
There is a natural evolution of these markets. We started 20-25 years ago in a minority investment market in traditional industries, where if the company wobbled or the market shut down, one couldn’t sell the company to a trade buyer because no promoter would want that. It takes 10 years for a fund to mature, and about five years to exit. When people look back at vintages, they say money has been stuck in India for a long time. So, 2002-2003, 2006, 2010 vintages worked fabulously.
People who had more public markets exposure and liquidity could manage to do well and return capital. Those who had a pure private strategy in minorities got stuck. As we rolled out into the last decade, buyouts are becoming more run of the mill, and more people are getting into it. Therefore, one can dictate the rhythm, the credence and the style of exit.
Also, with the advent of the technological boom, the As (Series A) are exiting to Cs and Ds, the Bs are exiting to Ds and Es. There is liquidity flowing in tech-driven scale-ups. That is also changing people’s perceptions that markets are rewarding if one gets in early. Today, all global funds are here. They are the recipients of businesses that one can grow and sell. For the next 10-15 years, Indian will be a great place for investments.
You were in the market to raise the fourth PE fund with a corpus of about $950 million. When is the final close expected?
We should be done by the end of summer next year. We have reasonably good traction with our existing LPs. We generate a lot of co-invests in our portfolio. So, we are also taking time to identify one or two large partners, who we want to come in as LPs and stand with us when we write $200-300 million equity cheques. We are already starting in the market to close transactions. Our first close is almost done, and we are running.
How will this fund be different from the previous ones?
From fund III, we invested in 12 companies because we think that’s the optimal size for us. Anything more becomes too distracting, and anything less becomes too concentrated. Out of those, we had only one significant minority deal OmniActive Health Technologies, which we sold to TA Associates. There’s no drift or change in the strategy. 10-12 investments that we will make from this fund will be controlled, maybe one or two minority especially in the sectors where we can’t access deals without being in the minority. We’re just going to start scaling up the size of investments. We do a lot of cross-border investments between the US and Asia in IT services and pharmaceuticals and we would continue to do that.
What is the status of your real estate and renewable energy funds?
On renewable energy, we are just about to close the fund, which is targeting about $740 million. That business has been investing in building platforms for two years now. We are probably the single largest climate change fund in this part of the world. We are using capital and capability to develop multiple platforms, and not just solar and wind, which has absorbed 90% of the capital. We are pushing ahead in mobility, waste and water.
We’re a dominant player in industrial real estate. We have 65% of the market for A-Grade industrial real estate in India. We have developed 25 million sq ft of real estate so far. With the existing funds, we have the capacity to develop up to 45 million sq ft of real estate. We have a private REIT with CPPIB, where we take stabilised assets and inject them into that vehicle. We will continue to dominate that asset class. We are in the process of raising the fourth real estate fund.
How much are you targeting for your fourth real estate fund?
In excess of $1 billion.
What’s happening in your credit business?
We played credit through fund II and a little bit through fund III in a platform that we started calling IndoStar in 2010. That business started with corporate credit and structured real estate credit, and we got enough pool of profitability. Four or five years into that journey, we started layering in the retail credit. As the world has moved on and post IL&FS crisis in 2018-19, that business has pivoted almost completely to retail. Brookfield is a large shareholder there. That business will completely focus on non-corporate secure credit, such as SME, retail, and housing. We have taken the team that worked with us out of IndoStar with full transparency, and we are in the process of raising dedicated capital behind that corporate credit team. We’re hopeful that in the next few weeks, we should be able to announce the closure of a vehicle, where we will start deploying capital in performing credit in India.
Everstone has combined strategies and has also built a lot of businesses from ground zero, like big conglomerates, which is not a traditional PE play. Your comments.
Sometimes people ask us if we are a business house or a PE fund. We bring the approach of a business house in a fiduciary construct. We don’t have as much capital of our own and have to rely on third-party capital. We bring an entrepreneurial mindset to deliver returns for our investors. When we started our industrial real estate business, people would say who wants to hold assets forever and that why do we want to get into a capital intensive and capital heavy business? Roll forward 15 years, and we have built a great platform. The same issue is with climate change and robots. People said why do you want to do something other than wind and solar. We think there’s an open space where we can build a mobility platform, which, in 10 years, will have 15,000 vehicles in India that are in B2G and B2C contracts. We try and marry capital with talent and technology, and see if we can create enduring businesses whether in private equity construct and beneath them.
Building platforms is a long-dated game and not necessarily suited to the private equity construct. People want exits. We own BurgerKing now for almost 7-8 years. We have owned IndoStar for 10 years and it takes that much time to scale businesses up. In fund III, we did no platforms but we did roll-ups very successfully. Ascent (PhamEasy) was a classic example. We rolled up 18 or 19 companies. Roll-ups are a lot easier to do and meet our criteria of rapid exits. But builds are long durations, and we haven’t done any in fund III. But we bring the same mindset of how do you buy businesses, how do you integrate them, how to grow them, and structure leadership.
What are the sectors or white spaces still left where you can start a business from scratch?
While starting a business from scratch is a long-dated issue, if you can spot opportunities where you can apply your capital and capabilities behind a sensible entrepreneur, there are lots and lots of industries waiting to be disrupted. Can you disrupt manufacturing? No. But can you disrupt the way a manufacturer approaches its end markets and end customers better than its competitors using technology? Yes. In D2C sectors, we are seeing massive amounts of disruption. Traditional methods of distribution have all fallen by wayside. Of course, building a new-age business takes a lot of capital.
Question is that in two years’ time will this liquidity be around to enable these businesses to continue? But if you can find a category killer with a great management team, one can capitalise directly. We bought Ascent Health four years ago when it had $35 million in revenue. Five years later, it has got $1 billion in revenue. If you think from a traditional mindset in a traditional industry, you can’t do that. You can’t grow a business 30 times. But today the market and the environment afford you the opportunity to do so.
In fintech, too, massive disruption is at the fore. You’re going to see that the next generation financial services businesses are not going to look like traditional businesses. Bajaj today is a technology company, and no longer a lender. Its market capitalisation is more than the State Bank of India. That trend will continue. Fintech is going to be No.1 when talking of disruption.
You mentioned fintech, but Everstone is not seen as an active tech investor as most of its deals in the space are minority investments. Do you see yourself doing some of these deals?
I never say no, but it’s not part of our core strategy yet. You can’t ignore the importance of technology in all businesses today. We whet our appetite with Ascent PharmEasy. We are taking the learnings from there. When we started that journey, we owned 65% of that business, and over a period of time, we have gone to a minority. You will see us replicate that journey, where we will start with a large stake, roll the business, continue to raise capital in that business if it is a category killer, and slowly wean away from being a majority player to a minority player and transition the business on to the next set of investors.
You also spoke about cross-border deals and buying out businesses in the US, be it IT services, healthcare, or pharma. Is that where you think you will leverage your strength where you can buy out businesses in any part of the world?
Throughout our investing career in different places, we have played those themes out. We just got early to the party and decided to get a physical presence in the US. Our operating partners in both pharma, IT services, and healthcare are based in the US, and we leverage their capabilities. There’s nothing that stops any of our peers from replicating our strategy. We were just off the block a little earlier. We will continue to refine that and go deeper into all sorts of other sectors within the IT services and IT-enabled services. When the world catches up in version 1.0, we want to be in version 2.0.
You have hundreds of employees with offices in Mumbai, Delhi, Bangalore London Singapore, New York, Mauritius. How do you measure return on all of these investments (talent)? Did that help you especially during the pandemic when your portfolio companies needed support?
The only way we measure it is what returns do we generate for our investors. It’s not just the numbers that matter because it takes a disproportionate number of total employees at least in the real estate world relative to other strategies. We have large operating teams that sit with us in all our strategies. I think their ability to grasp the issue, to parachute in to really figure out what is going on. Pandemic is a classic example. We had no idea what we were going to do. Because we were in Singapore, we caught it early and forced our companies to start thinking about conservation of cash, management of working capital, credit lines, manufacturing schedules and so on.
From April to December, our team was focused on ensuring that our companies navigated challenging times appropriately. So, it’s not just the sheer numbers but also about the quality of people. We didn’t have to rely purely on outsourcing service providers. We spent more dollars than any other firm or management fee on keeping our infrastructure alive. And it’s bearing fruits. We’re not aiming for just better returns, but also for more consistent returns.
You have listed so many of your portfolio companies, will you look at SPACs?
SPACs were definitely the flavour of last year. They are running into a little bit of a headwind now because the PIPE market for SPACs in the US is challenging. Therefore, there’s more dry powder than there are targets. Singapore has just put out its own regulatory framework for SPACs and asked us if we would be interested. The ecosystem is yet untested because there was a rush of liquidity into it and out of it. For us, it’s a wait and watch.