Private equity (PE) firm True North, one of the oldest Indian PE fund houses, is expanding into the private credit space. In an interview, managing partner Vishal Nevatia spoke about the opportunity that it sees in credit and how technology businesses have matured to make them attractive to PE investors. Edited excerpts:
For over 20 years, you were focused on private equity; why this sudden move to expand into private credit?
So first, it is not sudden; it is something we’ve been thinking about for five years. The idea always was that first we need to build a very strong foundation and prove ourselves that we can do well on one core product, which is the private equity product. And typically, to prove in private equity that you are doing really well, in our opinion, you should deliver on three full fund cycles. So, we think that has happened to us. Now, we have built a brand and understanding of businesses, which can easily be extended to other alternative asset classes. And the most natural one, after private equity, is performing credit.
Even if we have a billion-dollar fund in private equity, you know we can’t—even if you’re doing well—tomorrow go and raise $4 billion in the next fund. You can only grow very gradually to say $1.3-1.4 billion, and so on. So, globally, the largest private equity funds have all expanded into multiple products.
How big is the opportunity in the private credit space? Given some of the issues around large defaults in corporate India and fund managers making huge losses, do you see this is a more difficult business today than PE?
From a market perspective, the market opportunity for performing credit is massive, going forward. Private credit, today, is where private equity was 15 years ago. Okay, people have made some mistakes, lost capital.
There are very few fund managers that successfully raised, deployed and delivered returns on performing credit. But the ecosystem has, over the last five to seven years of investing, realized what works and what doesn’t.
How soon will the credit platform be up and running?
We have the team in place. We will decide in the next 30 days on the various aspects of the fund strategy, such as how much money to raise because you want to make sure that you raise a little less than what you can truly deploy to make sure we do a great job and don’t take too much money and then mess it up.
Many private equity firms are increasingly focusing on new-age technology businesses. What is True North’s strategy?
Way back in 2014-15, we saw that by 2020, all businesses will become technology-enabled businesses, and technology will no longer be a support function, and that there will be an omnichannel shift such that Amazon will become omnichannel, and we’ll get closer to Walmart, and Walmart will activate completely digitally-enabled to get closer to Amazon.
So, to that extent, for the last five years, we have been pushing all our existing companies and businesses to be highly digital.
So, we have two categories of businesses: digitally enabled, which are existing businesses that have used digitization, and another one that is set up to be digital from the start, called digital-first.
Today, we have been looking at almost all the digital-first businesses but waiting for them to mature, and we feel comfortable that now the chances of losing capital in them because they will want a level where their maturity is fairly low.
Today, we feel there are 50 to 70 such businesses in India that are digital-first and which have reached a level of maturity where the probability of losing capital is low. We think the number of these businesses, which are 50 to 70 today, will be 250-plus in the next five years.