India-focused fund manager Motilal Oswal Alternates (MO Alts) has made the final close of its fourth private equity (PE) fund at a whopping Rs 4,500 crore ($550.3 million) as it gears up to ramp up its investments in mid-market companies across India.
Called the India Business Excellence Fund IV (IBEF IV), the vehicle plans to tap sectors such as consumer, financial services, life sciences and manufacturing, besides a slew of new-age tech-enabled businesses, its MD and CEO Vishal Tulsyan said in an interview with DealStreetAsia.
“About 75% of IBEF IV has been raised from domestic investors. On the international institutions’ side, we have raised $35 million from IFC, whose participation underscores our commitment to the culture of sustainable investing,” said Tulsyan.
MO Alts’s third investment vehicle, which had a corpus of Rs 2,300 crore, has been completely deployed across 11 mid-market companies in India such as Kushal’s Fashion Jewellery, healthy snacks Happilo and fintech firm Kreditbee, among others.
Meanwhile, IBEF IV recently made headlines when it led online gifting platform IGP.com’s Rs 187-crore round late last month. Among other investments, it is also understood to have backed a footwear player that has leveraged e-commerce as a new distribution layer to drive growth.
Going forward, the fund plans to deploy about 10-15% of its capital in the new-economy segment.
“When we look to invest in a company, we take a more than 15-year view on the underlying business and the industry… We believe that [current] fears around India’s growth runway are overblown,” said Tulsyan.
“In our over 15 years of journey, we have never been more excited about investing in India … We expect the next decade to be India’s journey towards a $10-trillion economy, driven by sustainable growth in domestic consumption and a renewed focus on manufacturing.”
Edited excerpts:
MO Alts, which we traditionally knew as Motilal Oswal PE, has been in the system for long. It has seen various successful cycles of investments and exits. What are your key observations on the changing PE landscape in India?
The journey of Indian PE firms can be divided into three phases. One is the pre-2008 era. The advent of PE firms in India began in the late 1990s and early 2000s. That phase was characterised by a lot of optimism around the economy, when many PE firms sprang up to take advantage of the promised economic growth after a decade of economic liberalisation, and to leverage the demographic dividend of India. And like many others, this was the phase that also saw the birth of Motilal Oswal PE [now MO Alternatives].
Then came the years from 2008 to 2020. This phase started with the global financial crisis, which made a dent in the market optimism and the next 7-8 years were marred with uncertainty around exits. However, things turned around significantly in the last 4-5 years, with PE-VC exits gaining significant traction.
Finally, we come to the third phase that started from 2020 to what we see today. We have assimilated a lot of learning from the 2008-2020 phase and used it to refine our investment approach.
You just closed your fourth fund at Rs 4,500 crore. Take us through the LPs that you have roped in from both the domestic and global markets. What is your investment strategy?
About 75% of IBEF IV has been raised from domestic investors. On the international institutions’ side, we have raised $35 million from IFC, whose participation underscores our commitment to the culture of sustainable investing.
We focus not just on creating value for our LPs, but also on building organisations for the future. ESG [Environmental, Social & Governance] issues are integral to all our stakeholders, which range from our LPs, employees and management teams, to the employee base of our portfolio companies, among others.
IBEF IV is a sector-agnostic fund, with a special focus on consumer, financial services, life sciences and niche manufacturing.
However, going forward, we also hope to evaluate new-age tech-enabled businesses and expect to deploy 10-15% of our capital in this segment.
You started raising capital mid-last year when sentiments across markets were high. However, things took a turn for the worse this year with geopolitical issues, a difficult macroeconomic environment and volatile markets. How difficult was it to close the fund at this time?
While you are correct that the macro environment continues to be challenging in 2022, we believe that fears around India’s growth runway are overblown.
Domestic investors are confident about India’s future and this is reflected in the fact that financial markets have remained more or less stable in India despite $20.5 billion in outflows by FIIs until August 2022. It is the inflows from domestic investors that have supported the markets.
When we look to invest in a company, we take a more than 15-year view of the underlying business and the industry. Over this investment horizon, we will often face challenging macro environments.
However, in our experience, it is the quality of the underlying business and management that ends up driving our returns and exit. Hence, we focus our energies on understanding the business better and strengthening the management rather than trying to predict the trajectory of the global economy. Our LPs understand this approach very well and have demonstrated it during the fundraising process, which went very smoothly.
Experts are talking about a slowdown in India? Is that for real? How deep will that be?
While there are certainly some challenges around input costs and inflation, we believe that India is poised for 6.5-7% GDP growth over the next couple of years. The IIP data over the past few months have been heartening, with a growth of 12.7% in June and 2.4% in July. The Consumer Confidence Index has also continued to improve and reached 77.3 in July from its lowest point of 49.5 in July 2021 and 71.3 in March 2022.
In addition to these macroeconomic indicators, we also get a lot of on-ground real-time data from our over 24 portfolio companies. The overarching feedback that we have received is that all the companies are excited about FY23 and FY24 and are preparing for strong growth in the next few years. This reaffirms my faith that India continues to be a bright spot in the global PE investing landscape and is one of the best countries to invest in over the next 10-15 years.
Talking about the enormous funds raised by PE and VC firms this year, do you think LPs may take more time to deploy their capital given the current slowdown in the market?
While deal closures are taking a little longer in the last few months versus the timelines we had seen in 2020-21, the deal flow remains very robust in the mid-market segment. We are looking to close 6-7 transactions in FY23, which will translate into roughly 50% of IBEF-IV being invested by March 2023, and have guided our LPs to the same target. Given the quality of businesses we are looking to back, there is strong interest from our LPs to deploy their commitments.
With valuations of companies undergoing a significant correction over the past few months, do you think it will now become difficult for investors to exit their portfolio firms?
Over the past 15 years, we have completely exited 15 investments, having delivered a MOIC [Multiple on Invested Capital] of over 5x and many of our portfolio companies have, over the years, scaled to $3-7 billion companies from less than $100 million at the time of our investment.
Given this backdrop, one can confidently say that for quality franchises and businesses built the right way, there will always be a path to a good exit. We have witnessed this first-hand when we were exiting our first fund in 2015-16. Despite challenging market conditions, we were able to deliver very good exits such as AU Financiers, Dixon Technologies, Parag Milk Foods, Mrs. Bectors Food and Minda Industries.
While the IPO market has cooled in 2022, given that the Indian bourses have shown commendable resilience, we feel public listings will continue to be the favoured route for exits for high-quality, profitable businesses in the medium term. In the short term, investors may look at private markets for exits, given there is a record amount of dry powder available in the ecosystem and the long-term thesis for investing in the India growth story remains intact.
But, the share prices of many companies have fallen after their IPOs were launched last year. What will be its implications on the overall startup ecosystem?
We have seen a significant correction in the new-age technology IPOs that had come to the market in 2021-22. While this correction will lead to short-term pain for their investors, we believe that it has refocused the narrative on building companies sustainably and for the long term. These companies are now focusing on profitability and free cash flows, and we hope that this mindset will percolate to the founders who are just starting now. This will lead to a much healthier and more sustainable startup ecosystem in the next 5-10 years.
What will be the implications on M&A and capital flows if the Russia-Ukraine war goes on till the end of the year?
Given the complexities of global trade and supply chains, it is very hard to predict anything with certainty. But if the Russia-Ukraine conflict continues unabated through the winters, we are likely to see greater short-term pressures all around.
Energy prices, particularly for natural gas, are likely to remain high, thereby keeping inflation high. And consequently, regulators will continue to maintain interest rates at higher levels or increase them further. For India, this would likely mean that FII outflows may persist and the rupee may continue to weaken versus the US dollar, putting more pressure on foreign exchange reserves.
So far, domestic investors have stabilised the markets, but if the global stress continues, the impact on India will also increase. In light of this, markets are unlikely to rally in the short term and valuations may correct even further. This will result in good businesses becoming available at more reasonable prices, and given the large pool of dry powder available with GPs in India, deal-making activity will likely continue at a good pace.