For PE funds, team stability the key factor
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Stability of teams is the most important factor for private equity (PE) funds in the long-run, according to panellists at the Mint Special: Indian Private Equity Roundtable—How to Build an Effective Emerging Market Private Equity Powerhouse.
The panellists included Kunal Shroff, managing partner at PE firm ChrysCapital; Atul Kapur, co-founder, managing partner and chief investment officer at Everstone Group; Vishal Nevatia, managing partner at True North, Karan Singh, partner at Trilegal; and Sudhir Variyar, founding partner of Multiples Alternate Asset Management Pvt. Ltd.
Discussing founding partners’ transition and how the journey has been after the departure of ChrysCapital’s founding partner Ashish Dhawan, Shroff said that it is “very rare” to have a founder transition and equally it is commendable.
“However, because the senior team has been there long enough, it was more of an institution. I would go to the stability of the organization and say that having gone through it and having seen people’s strength and weaknesses, it was easy for us to organize ourselves in 2011... We have 150 years of investing experience and 80 years of operating experience. When we raised fund five, the collective experience, including Ashish, would have been half that. On an average, the senior team has been with the firm for around 12-15 years,” said Shroff.
Dhawan, founder of ChrysCapital, stepped down from an active role at the firm in May 2011 to focus on social issues, particularly education.
ChrysCapital recently raised over $600 million for its seventh offshore fund and has already made two investments from the fund. The PE firm had closed its sixth fund at $510 million in 2012.
“Since Ashish left, we have made 20 investments, 20 exits and deployed $800 million, exited double that. So, the same story people associate with Chrys and Ashish pre the transition, has continued on for many, many years post that,” he added.
Kapur of Everstone Capital reiterated that teams have to hang together and that the stability of the team is an absolute imperative. “This is not a business of geniuses, this is a business of experiences…if you start putting enough pieces in place, if you lay the right foundation in the business, it will survive,” he added.
Everstone Capital, with assets under management of $3.3 billion, was co-founded by Sameer Sain and Kapur, former Goldman Sachs executives and has been an active PE investor in India.
Nevatia of True North said, “It is extremely important if you want to build an institution, you need to have a deep dip. It should not be dependent on any one partner.”
True North, formerly known as India Value Fund Advisors and one of the early movers in Indian PE, is largely known for executing control transactions in India’s mid-market. The firm has worked with over 30 businesses and invested more than Rs8,000 crore of equity capital.
Singh of Trilegal said: “I think institutionalization must be a continuous process. Equally to de-risk founder departure or de-risk founder dynamics sometimes. Having said that, all of us are internal to our own structures, the market may perceive it otherwise and the market may perceive that there are a certain set of founding partners who are perhaps more experienced and therefore the organization is more reliant of those sets of founders/partners. But it is a question of a little bit of time and experience that will demonstrate that some of these organizations will outlast their first generation of partners and become true institutions.”
On whether ChrysCapital can raise another fund without Dhawan, Shroff stated that “the LPs (limited partners) are backing us because our track record has managed to perform despite various cycles in the economy. In most funds, even if you don’t have a specific person as a key man, the LPs will have a view that these three-four men are critical to the business and we want that partnership to flourish”.
With over $3 billion of assets under management across seven funds, ChrysCapital has made close to 80 investments in India and 60 full exits.
Responding to a question on how economics are distributed among the partners in their firms, Nevatia of True North said his firm has a policy of equal share among all the GPs (general partners), with the managing partner getting one extra share for the additional responsibility he takes.
Variyar of Multiples, a leading Indian mid-market PE fund, said that there are different people who come in at different points of time, so there are different contributions, along with a fair sharing of rewards across different levels.
Shroff of ChyrsCapital said, “Our founders take zero. In general, the philosophy is to spread carry across the firm and it is been in the old days as well. We continue the same trend.”
Kapur of Everstone Capital said that the firm’s economics, which is not the equity of the firm but the way the profits of the firms are distributed, goes down to the associate level and from the associate upwards, everybody has carry.
Talking about the key lessons from True North’s perspective, Nevatia said that it is important to make sure that you have entered into a partnership with the right management team, diversity in portfolio and strong sector focus on the sectors you understand better.
On rebranding, he said that the erstwhile brand India Value Fund was very generic and did not seem to reflect either its business model or ethos and philosophy, and that is the reason for rebranding the firm.