Indian PE firm True North earmarks $200-250m for new-age consumer startups

True North partner Ashish Bhargava

Indian private equity firm True North has earmarked about $200-250 million from its sixth fund for 3-4 deals in the consumer space, its partner Ashish Bhargava told DealStreetAsia in an interview.

The firm, which has been an investor in the country’s traditional consumer businesses, now has its eyes on new-age consumer startups that are building strong niche brands on the back of the digitalisation wave spurred by COVID-19. Some of the segments within consumer that the firm is bullish on include gourmet food, personal care, and sports equipment.

As some of these companies have matured, True North, a late-stage investor, feels it’s the right time for it to step in and participate in their next funding cycle. To be able to invest in such companies, the company will also reduce the threshold of its ticket size per deal, provided the business model is lucrative enough and promises good returns, Bhargava said.

“We come in very late and typically invest $50-100 million in a startup. However, we cannot infuse so much capital on a single deal in the consumer space. One important distinction that we have made here is that we are allowing for lower investment ticket sizes for consumer startups. While the initial ticket investments for these companies may seem lower, they eventually require follow-on capital. Getting a strong investor onboard early will at least ensure that the founder is not in a perpetual fundraising mode, and can rely on the current cap table to meet future capital requirements.”

Bhargava feels that some of these consumer companies have built very strong business models and would have thrived and gained investors’ attention even if there had not been a pandemic.

True North closed its sixth fund, from which it is currently investing, in 2019, raising about $600 million, falling short of a revised target. True North had launched Fund VI in late 2017 with a hard cap of $1.1 billion, which was subsequently revised down to $800 million. Its fifth fund had raised $700 million.

The PE firm manages about $3 billion under its six funds and has a portfolio of companies that include Fedbank Finacial Services, Magma Fincorp, Homefirst Finance, Infinity Fincorp, KIMS Hospitals, Trivitron, Cloudnine Hospitals, Hicare and VKL Spices.

Edited excerpts of Bhargava’s chat with DealStreetAsia:

What interests you about the consumer space?

With the onset of COVID-19, the penetration of e-commerce has advanced by 3-4 years. What we find most exciting about these new-age consumer brands is how they have driven distribution through e-commerce. They are reaching out to consumers either through collaboration with third-party players like Amazon, or they are building their own e-commerce websites. What’s unique about all of them is that they’ve taken on a single proposition, which is philosophical. They are promoting natural ingredients and products. The new emerging story seems to be moving from a single brand, mass proposition to a single proposition with multiple products under that proposition.

True North has not been very active in the consumer space of late. What has revived your interest?

We have been out of action on some of the newer deals. But, the DNA is there. We understand new-age and have the risk appetite and capability to underwrite such transactions. Historically, we’ve done that. We helped Zydus acquire the Heinz brand, and we also acquired a controlling stake in Ayurveda-based hair oil maker Sesa Oil, where the whole investment thesis was to build a big ayurvedic platform company using traditional as well and modern business methods.

Today, a lot of consumer companies have matured and attained the right size for us to step in. We are a late-stage investor, and we need some proof of concept that this model is here to stay. Their size gives us the confidence that they will not do something that all of us are very scared of — pivot. This word, at one level, is very interesting, but at another level, it means capital loss. They have a steady and strong stream of consumer following, which is very important from a sustainable growth perspective. Even though they are losing money, at the unit economics level, the business is very attractive. As they gain scale, they will turn out to be good businesses.

So far we were not very comfortable with the kind of investments that we’ve seen in the market. For us, it’s very important that we complete the full cycle of creating value. A lot of new businesses have created a lot of value that consumers cannot live without. But that value is captured as and when you see the profits coming. Profits are important from a sustainability point of view.

Within the consumer sector, what will be your focus areas?

It totally depends on the fundraising cycle. However, the segments we will be very hot on include gourmet food, personal care, sports equipment, and alternative experiences. Some startups in these sectors are pretty ripe and have had enough depth and width to deliver.

We see new formats emerging within food, and also premiumisation happening. Premium food brands are taking the centre stage, at least in the metros or top ten Indian cities. Indian consumers’ palate is becoming a lot more Westernised, which will spawn many more brands. Retail space, whether it is e-commerce or modern trade will allow the right kind of selling environment for these kinds of products. The same thing is happening in meat and milk delivery.

The Indian consumer has evolved and is willing to pay, and there is a margin to be made. Premium products are potentially not niche anymore and are here to stay. Earlier, the distribution of fresh food was pretty poor in India because of a lack of cold chain facilities. Going forward, we will see a lot more cross-pollination and collaboration happening.

You will be competing with some of the venture capital firms for deals in the consumer space. How will you take on this competition?

It’s a question of the stage of the business. In every stage of business, the challenges are different. In an early stage, the nature of challenges is very different, the constraints you need to put on a business are very different. Our experience is better suited to manage late-stage companies. We are pretty good at collecting the right teams, putting the right processes in place, at financial control, risk, and governance. There are some things that we understand well, and there are some things that we don’t understand. We would like to play to our strengths.

How much of the sixth fund is already deployed? What are your plans for a new fund?

We’ve deployed roughly about 74% of the corpus. For any fund, typically, we would like to do between 7-9 deals. Going by this calculation, we are looking at wrapping up this fund in 3-4 years. We will get into the fundraise mode after we get some meaningful exits. As of now, there are no plans for a new fund because we have enough under our belt.

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.