Mumbai-based private equity firm Carpediem Capital has been an active investor in consumer brands space in India in the last few years, with its focus on small and medium enterprises.
Through its $30 million fund, the investment firm has already made investments in four companies — food retailer Biryani Blues, mobile repair and refurbishment startup Yaantra, medical devices distributor ColMed and food processing firm Adinath Agro.
The fund is now looking to invest in another four to five companies through its fund, and plans to achieve 70 per cent deployment by the end of the financial year.
In an interview with DEALSTREETASIA, Abhishek Sharman, Founder & Managing Director, Carpediem Capital, talks about the current investment climate in India, and Carpediem’s plans for growth. Edited excerpts:
The private equity space has seen some ups and downs in the last few years. How do you view the current investment ecosystem in India?
Private equity firms, given that they have seen a few cycles in India, are now much more focused on doing deals at the right terms. However, the challenges in the current climate are if you are sitting with a lot of un-invested capital, which a few firms are, and the high public market valuations which are often used as comparable for even private deals. It’s a good time for exits but more challenging for investing unless you are focusing on an ecosystem which is structurally capital starved like the one we focus on as Carpediem.
How many companies have you invested in so far and do you have a number in mind for the companies you plan to invest in through this fund?
Carpediem Capital Partners Fund I (CCPF I) has invested in four companies so far. We anticipate investing in a total of eight to nine portfolio companies from this Fund.
Carpediem is more targeted at consumer brands, a space that hasn’t been on top of the investors’ list when compared to tech-led startups. How has this space evolved in the last few years? Are there any particular sub-sectors that you would be keen to invest in?
Consumer brands have always been of great interest to private equity funds and continue to be. The challenge has been to source deals because fundamentally these companies don’t require capital to scale up after a point. Consumer brands take time to get established. That is the reason there are fewer consumer brands and therefore, these brands are “valuable”. If we are looking for brands in breakfast cereal category or the toothpaste category, it is unlikely that we will find tens of interesting players.
However, tech investing, which VCs pursue, is a different ball game. So firstly, VCs have been very prolific in the last few years as “unicorns focused on tech” became the focus and the biggest value creation opportunity in the minds of investors. Secondly, VCs invest in startups assuming a certain mortality rate (unlike PEs which wait for a consumer brand to be created and then go after it). So, we saw the VC activity outshouting the PE activity with investments in foodtech, edtech, fintech, etc. But, the value and attractiveness of consumer brands is undiminished.
Consumer brands have also been seeing a lot of investor attention lately. How do you view the competition in this space?
As I mentioned earlier, consumer brands remain a strong focus area for investors. In the recent past, we have seen some reallocation of technology focused capital to consumer brand centric models, some of it because of (investors) not getting enough returns from tech investments.
Valuations have been a cause for concern for investors over the last few years. Have they rationalised now?
They haven’t for the wider market, given the public market valuations and this is a cause of concern if the focus is deployment and not exits. However, CCPF I has demonstrated ability to source reasonable deals (much lower than market) even in an aggressive public market pricing environment and that is because we focus on structurally capital starved segment where there isn’t a lot of competition.
What is your investment strategy? How do you plan to expand your portfolio?
CCPF I invests in SMEs that will be key beneficiaries of India’s consumption growth. Our focus is on two themes – companies creating a consumer brand or a service which is moving from unorganised to organised sector. Our preference is for significant minority/controlling stakes and to be the first institutional investor in the company.
Our target sectors are consumer products & services, healthcare, managed services and financial services.
What is the status of your maiden fund? It it closed? How much did you make the final close at?
We did the final close of our fund in September 2016. We have raised a little over $30 million in the fund and we have additional co-investment commitments through select managed accounts.
How much of the fund have you deployed till now? Will you look at another fund any time soon?
We have committed 50 per cent of the fund and expect to be 70 per cent committed by the end of this financial year. Currently we are completely focused on deploying this capital. Once we have committed Fund I, in the natural course of things, we will plan a further pool of capital. However, the focus currently is to deploy the Fund I capital judiciously.
Exits have been a pain point for investors. Has the situation changed now as we see the number of IPOs and secondary share sales increasing?
In general, the exit environment is much better for most private equity funds and as data indicates this year has been a record year for private equity exits as it reached $10.3 billion in calendar year 2016 (10 per cent higher than the previous year). The sub-segment that we focus on (consumer brands and organised services) is generally of high interest for larger sponsors / strategic players and hence, in this sub-segment we don’t see exits to be a challenge provided the execution has been robust and the companies are doing well.
What is the average size of investments that you make? Will you be looking at cutting bigger cheques any time soon?
We have invested $2-6 million from the fund and have gone to larger sizes including co-investments. We do have the desire to support our portfolio companies longer since we have been able to partner with some very interesting companies in our first fund. However, we won’t be looking at larger cheque sizes from the fund currently.
Would you also be interested in investing in overseas companies? If yes, then which regions and sectors look most attractive?
No, we are very focused on the domestic consumption story and the demand for branded products and organised services which is playing out in India currently, given the strong underlying demographics. We don’t see ourselves diversifying beyond this theme in the near future.