Even as initial public offerings (IPOs) as an exit opportunity are drying up in India, exits via the secondary sale route are still possible, said homegrown private equity firm True North’s partner Satish Chander in a virtual session at DealStreetAsia’s Asia PE-VC Summit 2022.
“There’s just one form of exit that has dried up, which is IPOs. It was anyway a very small part of overall exits, but became big for a brief period,” said Chander.
True North is one of the oldest homegrown private equity firms in India and manages about $3 billion in assets across six funds. Its investments are focused on four sectors — healthcare, financial services, consumer, and technology. The firm is also reportedly on the road to raising its seventh fund as it looks to ramp up investments in the digital space.
“It is a difficult time to raise money, but also the best time to invest. We have an investable runway in our fund six, but we are still on the road because investing opportunities in the market are so perfect right now that we can do many larger deals,” said Chander.
Edited excerpts of Chander’s chat with Paramita Chatterjee, editor, DealStreetAsia:
Global markets are grappling with uncertainties — geopolitical issues, equity market corrections, high inflation, and interest rates. What do you think about the slowdown that’s weighing on the Indian economy?
Nobody is an island. All of us are connected globally. India did go through a slowdown but witnessed a sharp recovery after COVID. That recovery is slightly muted because of global geopolitical and other issues playing out. We’re doing well in terms of GDP growth. With the base effect, we grew at 13.5% and without the base effect around 7-7.5% for the full year of 2021. There’s imported inflation and central banks are taking measures to tackle it.
Disturbed capital flows may have an impact on India but the economy is doing slightly better than other economies in terms of how the currency has performed. Barring a couple of sectors such as oil and auto, the country is performing well. The effect of inflation is also moderating and we see encouraging signs across several consumption- and investment-related themes.
“Barring a couple of sectors such as oil and auto, the country is performing well.”
The US economy is facing something akin to stagflation. What will be its impact on capital flows and the startup ecosystem in India?
Historically, the US economy has had an effect on every other economy in the world. They are grappling with high inflation and want to bring it down. While they have made small movements in terms of increasing the interest rate, it has led to a situation where everybody is chasing risk-free assets. So, capital is flowing back to the US or the capital that was initially flowing into the emerging countries has slowed down.
Its immediate effect can be seen in the public markets, but not so much in the private markets. You may see companies pulling back from their IPO plans, but they will continue to get funded by private equity firms. While fresh fundraising may seem difficult, startups that have already received capital commitments from the funds should not be much affected.
“You may see companies pulling back from IPOs, but they will continue to get funded.”
Investors are definitely taking a little longer to evaluate companies. But, we don’t see that as a big reason to worry. A correction was due since the frenetic pace that we witnessed 12-18 months back was unsustainable. It’s a great time to invest as valuations are more reasonable now. Companies with strong business models, teams, and execution strategies will continue to attract interest.
Which sectors have seen a valuation correction? Did you encounter a situation where deals had to be renegotiated because of valuation issues?
The traditional sectors have witnessed small corrections but not as big as we saw in the case of digital-first companies because with them it was more of an art than a science because there’s also not a long history of cash flow to look at.
Speaking of the traditional sectors, pharma has done quite well and there are still a lot of opportunities. Technology-led financial services and consumer companies have also seen corrections. There are sectors that have benefited from the entire COVID supply chain disruption. India being the destination for manufacturing has done well.
Talking of healthcare, before COVID everyone had concerns about cost and price, but ignored capacity. COVID helped focus on capacity building in healthcare. During COVID time people realised that they are behind on supply compared to the demand that existed. Prices are no more concern but the quality is. And with all that pent up, both performance and valuation have improved.
Is the PE industry going through a slowdown as far as exits are concerned?
Exits have not dried up. There is one form of exit which has dried up, which is IPO. It was anyway a small part of overall exits but became big for a brief period. We have seen companies coming back to the IPO market in the last month or so. But even with these green shoots, we wouldn’t get back to the previous levels very soon.
“We see companies coming back to the IPO market, but we won’t get back to previous levels soon.”
If someone is trying to get an exit in terms of financial sponsors doing a secondary and buying stake, that is still possible. It will take longer and won’t be at the same pace as earlier. There will always be some venture funds, which have done their time, and there will always be some late-stage funds that will be looking at the next stage of growth and deal sizes differently. We are also having conversations with our portfolio companies, or are at least running processes. We definitely see strong interest.
True North has seen so many cycles of investments and exits. Any take on how the landscape in India has changed and how do you compare the market here with that of other Asian markets?
If we compare the current situation to the situation a decade ago, the private equity market has matured quite a bit. The entire market ecosystem, comprising the bankers, the intermediaries, or the consultants who work for the founders and the firms themselves has matured.
Founders have more clarity about private equity in terms of the things that they are getting and the things that they have to do differently when taking money from the firms. Discussions with the founders around control transactions, which used to be very difficult about 10-15 years ago, have become easy now.
“Valuations in India are quite high compared with let’s say Europe or the US.”
India is a growing economy and offers a lot of opportunities. A lot of global firms are entering India, and that speaks volumes about the size of the PE market in the country. There could always be some delta in terms of the risk or sometimes the vision that some of the funds may have. That’s maturing quite well. And that’s also a sign for exits. When you are exiting, you know that there are other firms that are looking at larger deal sizes. Of course, with so many of them being there, there is pressure on valuation and there is competition. But that’s part of any market cycle. Valuations here are quite high compared to let’s say in Europe or the US, and businesses are growing, which is sustaining some of those valuations.
How would you differentiate between homegrown and global funds? What are the key advantages that homegrown funds have and how are you planning to leverage that?
There are two areas where we compete with each other. First is fundraising. If a homegrown and a global fund are there in the market to raise capital, a global fund may have an advantage in terms of re-ups. It might be easier for them to raise capital with an India allocation than for us to raise an India-focused fund, especially in the current macro situation.
“If a homegrown and a global fund are in the market to raise capital, the global fund may have an advantage in terms of re-ups.”
The second is in the deal space itself. There I do not see this binary of global versus homegrown because each one of us has positioned or differentiated ourselves on a few things. Some of those factors might be common between us. We just see firms as firms competing in a marketplace, having their own differentiation.
We’ve been around for almost 22-23 years, and that has worked in our favour. We have done a lot of control transactions, which gives an opportunity to get a little more involved in a company. Because we have been trying to recruit CEOs and CXOs for different companies, we understand the talent and the management space quite well. We do lend a helping hand to the founders when it comes to recruiting the right talent. We share good relationships with our founders. For decision-making, too, we do not rely on an outside expert. We can get back to the companies very quickly based on the prior work we have done on them. We see all these factors as great differentiators.
From control transactions, do you also plan to shift towards early-stage deals?
We have done controls more than any other firm. However, minority deals account for about half of our deals. Of course, because the control deals are bigger in size, they absorb about 60% of the fund’s corpus. We still enter at a later stage and invest only in companies that have proven their business models. We have also been looking at digital-first companies that are disrupting the market with their innovations. The stage at which we enter these companies is a bit earlier than what we would normally do with traditional companies. It’s unlikely that we will be among the early investors unless the startup has attained a leadership position in the space it is operating in.
“We enter at a later stage and invest only in companies that have proven business models.”
We have not invested in many digital-first companies but we have been actively exploring the space. We now have a sharply defined list of companies that we have tracked over several quarters, and are in a far better position to take a quick call and enter these companies.
True North is reportedly on the road to raising over $600 million for its seventh fund. How challenging has it been to raise capital? How are LPs viewing the market?
We have not put out a number for any of our funds. So there’s a lot of speculation going on. This is certainly not an easy environment to raise funds. Things are changing so much and are so uncertain that people are getting comfortable with safe havens, which is the US. There are also worries about how currencies behave as central banks take some of these actions. So it’s an overall broader asset allocation call that LPs are still grappling with.
“This is certainly not an easy environment to raise funds.”
The most important factor that people are missing out on is the growth opportunity in India. It’s not easy to find similar high-growth investable opportunities in any other economy. We have been in the market for long; our team has been stable and together for a long time, and we’ve worked with the investors across our six funds. So that’s the balancing factor and we are having conversations.