Private equity firm True North, formerly known as India Value Fund Advisors, is one of the largest domestic private equity funds in the country. With a combined corpus of $2 billion under its belt, the firm is currently investing out of Fund V, which has a corpus of $700 million. The Mumbai-based private equity major, which has invested in over 30 businesses, is also reportedly looking to raise a $1-billion new fund.
After 17 years of investing in India, Vishal Nevatia, Managing Partner of True North, talks about how the investment market has shaped up in India and the private equity firm’s evolution in strategy and its new focus on the technology sector. Edited excerpts:
As a veteran investor, how do you see the current private equity market in India?
We have been around since 1999 and many cycles have happened. The years 2009 till about 2014-early 2015 were very difficult years. One, we had the global financial crisis and then our own domestic crisis of confidence. Second, during 2006-08, a lot of private equity funds got started; that number almost exploded from 40 funds in 2005 to about 400 in 2008. There was a lot of competition and valuations were getting pushed up even though the environment wasn’t good. The commitment period for a lot of these funds got over in 2012-13. Since money raising in India has been a big challenge, not much new money has been raised since 2008 relative to earlier. Today if you look on the ground, there are far fewer domestic private equity funds who have money to invest, so there is lesser competition. More importantly, there is more mature competition. People who are still around now have done relatively better and we have all learnt a lot of lessons. We have all been battered and bruised.
We are also seeing that the whole ecosystem has matured a lot. Five or seven years ago, when we invested in a business, it was the first time that the company was taking private equity investment. So, for the management team or the entrepreneur to understand what private equity is itself was a learning. Today we have at least 5,000 companies that have experienced private equity or venture capital in the last 10 years, so now when we are buying or investing in a business, the management team or entrepreneur has already experienced one round of private equity or venture capital funding. It’s a far more mature market to be in. We are finding that in the last 2-3 years, the entire environment is a lot more conducive to very good quality investments.
How much of that has to do with the improvement in the regulatory changes that have taken place?
I don’t think much. Obviously, there were some irritants but I don’t think they were making a difference in people investing or not investing. There were not such big hurdles. It is just the maturing of the environment, which is a natural evolution.
We are now also seeing a significant increase in control transactions. If you look at data for the last two years, the number of private equity investments where the PE firms own more than 51 per cent has doubled. In that, if you focus on sectors like financial services and healthcare, which are sectors of interest for us, the number of increase in control transactions is 3-4x. It is a function of the fact that now if the entrepreneur feels no longer interested in growing the business or does not have the capability to continue, he is very happy to step out. Selling a business is no longer seen as a negative.
Similarly, we are also seeing a number of senior leaders who have worked with a large conglomerate for 20-25 years say ‘Now let me do something that is closer to entrepreneurship and be part of a situation where we go and buy a business and then we can put our stamp on it and grow it’. For example, five years ago, if we were buying a business and we were looking for a CEO partner, we had to go search and convince them. But today we are getting calls inquiring if we have a business for them to lead, or that they want to buy a business and if we can support them. This is a very interesting change because obviously, it is important for these things to come together.
At True North, has your investment strategy changed over time?
Firstly, when we started in 1999, we were very clear that our core purpose for creating True North was to build admired businesses across economic cycles. We said that if we do that since we are in a country that is evolving and emerging, we will create a few businesses which will have a large impact on the market. Secondly, in the process, we will also create a lot of value for the stakeholders. We are structured accordingly. We have an investment team and a business management team comprising people with deep operating experience like CEOs and Managing Directors of large companies whose passion is to build admired businesses. From day one, 80 per cent of our money has gone into companies where we own more than 51 per cent stake in the company. We are among the very few investment firms that have been around for over 15 years and have done the maximum number of control deals. To that extent, from a core strategy perspective, our strategy remains the same. In fact, our strategy today is far more relevant and will be far more relevant for the next 15 years than the last 15 years, because those were early times.
In terms of changes, we truly believe that sectoral focus is going to be a huge advantage because we can build much better businesses in value. We were also very conscious of the fact that we don’t want to get into any adverse selection. If we are too focused too early, we may end up buying things that are not right. Over the last five years, we see enough depth in sectors. So, we organised ourselves into sector-focused teams two years ago, which include financial services, healthcare, consumer and the fourth one, which we are building and will take us 3-5 years to fully build out, is technology products and services.
Isn’t technology investment in India a slightly crowded space?
Till about five years ago, we did not focus on technology because we felt that global funds were better positioned to understand technology and we should stick to our core competence. However, technology is going to be all pervasive. All businesses will become technology-centric businesses. Having a deep understanding of technology is no longer a choice but a compulsion, be it in healthcare, financial services, or consumer. We have spent a lot of time and investments in making sure that we understand technology and keep ourselves abreast there. If we keep doing that for our existing businesses, then why not start investing in technology-centric things? The market is very large and there are many other players but that does not mean that we don’t do it.
Exits have always been a source of concern for investors. How do you view the exits environment in the country?
One of the big challenges for private equity funds has been exits because if you look at the past data, almost 90 per cent of all private equity investment was minority growth capital. The only exit option that was planned was an IPO, and that window has been pretty much shut for most time since 2009 till about 18 months ago, so people didn’t have that option. For us, however, because 80 per cent of our money is in control deals, our primary exit option is always a strategic sale to larger company or conglomerate, be it Indian or international. Towards that, we have not had exit challenges because through the years, we have returned over $1 billion every year. IPO is not an option for us because we own 80-90 per cent of a company. For the industry, however, the IPO route opening up is a very good thing.
Now that the capital markets are opening up, would you also be interested in PIPE deals?
PIPE deals have always been there in the market. If you look at 2003-08, most private equity funds that invested in PIPE deals did extremely well. But we have been very clear that our focus is on building admired businesses and we should focus on that rather than be all over the place where other funds do a much better job.
What is the update on the new $1-billion fund that you were planning that was recently reported?
Right now it’s work in progress and we think it’s too early to talk or comment on that.
Right now, are you deploying from the $700-million fund?
Yes. We have two pools, one is the $700 million and the other is a $500-million co-investment pool, which is an evergreen fund. For any investment that is more than $100 million, we will draw down from the co-investment pool. We can easily deploy $100 million from the $700-million pool and another $100-150 million from the co-investment pool. So we have reasonable capital for the next six months at least.
With domestic private equity firms like True North, Kedaara and Chrys Capital raising large funds, are foreign investors now more keen on domestic PE players?
If you look at the amount of money that foreign funds are raising for Asia-focused funds, it’s massive. KKR, TPG and all are raising $5-7 billion funds. There is a huge advantage to pan-Asia funds because all emerging markets have their cycles. Suppose India is going through a down cycle, then a pan-Asian fund has the opportunity to invest in Japan, Korea and China. If you’re stuck with a country fund, then you have no choice but to invest in that country. To that extent, their preference is pan-Asian funds and they will invest in country-specific funds very selectively. They will do it with managers who have a good track record and have been around for a while.
How about domestic investors? Now we see a lot of domestic capital coming in for investment.
We haven’t really marketed in India. For us, given our size, the minimum ticket size is $20 million and that kind of money can only be given by an institution. Because of regulatory reasons, the institutional capital for private equity is very low in India. When people raise private equity money in India, it’s largely HNIs, through which one can raise Rs 500-1,000 crore. To raise a $700-800 million fund, you largely require institutions. It’s a positive thing that there is more domestic capital available. It’s still very early days though and we hope that institutions like pension funds and insurance companies will also start investing in private equity. That is when you will be able to raise large pools of private equity in the domestic market.
Do you see the pace of investments picking up now that you say the market is more conducive?
In the last two-and-a-half years, we have invested around $1.5 billion. So, clearly it has picked up because before that, our average investment pace was more like $200-250 million a year. So, this is almost doubling that speed. We don’t think of it from an annual target perspective. We are very bottoms-up in terms of functioning. If there is a good opportunity, we can invest $1 billion in a year and if we don’t find any opportunity, then we may not invest for two years also.
How do you see the next one year for the private equity space and for True North?
The market is really maturing. We are finding very interesting deals and now is a very good time to invest. I don’t know if we’ll be able to invest $1.2 billion in the next years — it could be $800 million or $1 billion but it’s difficult to predict. Overall, one has to be careful about valuations because when public market valuations are so high, the general expectation is that private market valuations will also be very high. Subject to that it is a very good environment and we are very positive about it.
Do you think that valuations have now settled down or are they still very high?
I still think they’re high. I don’t want to use a broad brush but generally, it’s frothy. At True North, have a good pipeline and we look forward to making more good investments at the pace at which we have been doing in the last 2-2.5 years.