Exits from portfolio companies in India have always been a concern for private equity (PE) as there are limited exit avenues. Initial public offerings (IPOs) are key to exits, according to Arjun Anand, investment associate at Verlinvest SA, the Brussels-based family office of one of the Belgian families related to brewer Anheuser Busch InBev NV (ABI).
IPO activity in India has been robust of late, but Anand pointed out that only those PE-backed companies that have built up enough scale and profitability have been able to opt for initial share sales.
“The avenue that has not moved a lot is secondaries—we are now starting to see some progress with a few VC (venture capital) and PE firms doing secondaries for part of their portfolio but this is still in nascent stages and will need to develop,” he said.
Secondaries are sales by one PE firm to another.
During an earlier interaction, Verlinvest said ChangedEdu, its education arm, was slated to close a couple of deals this summer as part of its plan to deploy about $300 million in the next three-to-four years. Earlier this year, you had invested $30 million in Byju’s, an Indian-based education technology start-up. What is the status of other deals? Do you plan to bring Byju’s, too, under your ChangedEdu platform?
We are impressed by the size and potential of the education sector in Asia. As a firm, while we have been looking at education deals for some time, we took the call in 2016 to add education as a strategic pillar of investment at Verlinvest.
We have made three investments so far in the sector—XSEED, an innovative curriculum programme for schools with over one million children on the platform; Byju’s, the leading ed-tech company in India, and ChangedEDU (Holdings), the education platform founded by Brian Rogove, the ex-Asia-Pacific CEO of Cognita group of schools.
ChangedEdu has made good progress over the summer by closing a few acquisitions and building up a full team to integrate, manage and expand these assets.
Byju’s in India is an independent minority investment made by us early this year. There is no plan to bring it under the platform.
When you look at the education sector in India and South-East Asia, how big is the opportunity? Which are the key markets? Is there scope for regional or pan-Asia firms in this space, and if there is, which sub-segments within education will be most conducive for them?
According to some estimates, Asia-Pacific makes up one-third of the global education expenditure—which is over $5 trillion. So, on the face of it we are talking about a massive sector. However, it is highly fragmented and there are few players of global or pan-Asian scale and this is really the nature of the sector and we don’t see that changing fundamentally. So firms like ours have to be careful in selecting segments and opportunities that have limited regulation and have high growth potential.
The segments that are particularly interesting to us in Asia are English language training, K-12 services which don’t directly fall under fully regulated areas and enrichment services which cater to children post-school.
Of late, several PE firms are looking at the education space. We recently saw EQT invest in Vietnam’s English language trainer ILA. With increased interest in this sector, are valuations a concern?
Yes, the education sector has been through a few cycles with private equity and we are seeing rising interest in the sector from PE funds. This certainly has an impact on valuation, especially on deals beyond a certain scale. However, we are optimistic of the long-term potential of the sector which, has a large headroom for growth and development.
Not just education, but are valuations a concern in the sectors that you are interested in? Also, which are your focus sectors and what are your plans for these sectors in India and South-East Asia?
Valuation multiples remain much higher in Asia than in Europe or the US because of growth expectations; but this growth is not uniform across countries and sectors, so we are careful to pick the spaces we play in. Our priority sectors are food and beverage, retail and hospitality, e-commerce and education.
Exits have always been a concern in India. How do you see this scenario?
This is always a concern in India as there are limited avenues to exit. IPOs remain the key one, and it’s good that the capital markets have opened up with a number of PE-backed companies listing recently. However, these are only for the ones that have built up enough scale and profitability to launch an IPO. Trade sales are few and far between and we hope to see increased interest from strategics in markets like India in the coming years. The avenue that has not moved a lot is secondaries. We are now starting to see some progress with a few VC and PE firms doing secondaries for part of their portfolio, but this is still in nascent stages and will need to develop.
Be it India or South-East Asia, why should any company come to Verlinvest other than for capital? How much do you bring to the table other than capital?
Globally, as a firm, we operate only in the branded consumer space. Our heritage, network, past and current investments and expertise have all revolved around this very focused area. Hence, in our four verticals of interest, we bring consumer brand expertise that help us on investment strategy as well as developing our portfolio companies.
To add to our experience in creating large global consumer brands, we work with experienced operational advisors who have retired from global leadership teams of large consumer companies and have been associated with us for a long time.
For example, Chris Burggraeve, the ex-CMO (chief marketing officer) of AB InBev, is an operational advisor and helps several of our companies.
Similarly, Bernard Hours, the ex-COO (chief operating officer) of Danone Globally, is an independent board member of Verlinvest and an active operational advisor to our companies. We are very open with our network and experience with our portfolio companies, which adds value to the entrepreneurs and management teams.
As a family investment company, our investment philosophy and structure is to create shareholder value over a long investment horizon which can be substantially longer than the 3-5 years horizon of typical private equity funds.
This means that Verlinvest is able to align itself with the management and the other shareholders on how to develop and execute long-term development plans without the typical exit considerations which sometimes constrain the ability of financial buyers.
We understand that young consumer brands require a substantial amount of time and capital to mature and reach the goals of its creators and partners. Hence, this philosophy helps us.
For example, one of our portfolio companies in Belgium called Armonea, a leading nursing home operator, has been a Verlinvest portfolio company for more than 12 years.
Finally, our team is a good mix of both investment professionals and industry practitioners with hands-on experience. Our team is actively encouraged to work in our portfolio companies and several members have been seconded in companies for a few years. For example, Nick Cator, who leads our Asia business, was earlier the CEO (chief executive officer) of Armonea, our nursing home investment in Belgium.
When you look at deals, is there a criterion in terms of how you can synergize? For example, you have business in Europe and when you look at deals in India and South-East Asia, do you see if the company you are talking to, or if your existing portfolio companies can leverage this?
We use a lot of the experience and knowledge of consumer trends across geographies and in our investment decision making. We actively encourage our businesses across the globe to interact and host tailored sessions around topics like leadership, organization and branding for our CEOs across portfolio companies.
We also actively looking at taking our brands global—and this is where some synergies start to materialize across our firms. However, there is no blueprint for success in consumer brands and each geography and business is different. Where possible, we leverage expertise and strengths of our portfolio firms with each other.
Has the Prime Minister Narendra Modi government delivered on its promise to improve the ease of doing business?
The Modi administration has certainly made it a priority and is quite vocal about it to improve the ease of doing business and especially lessening the travails of small companies. We have already seen progress over the last few years but there is still some way to go to move up significantly and in comparison to western markets.