Early-stage investments need a lot of management bandwidth: Rajesh Kamat
A stable government and growing economy have boosted investor confidence in India, and this is being reflected in continued capital inflows, says Rajesh Kamat, managing director of Emerald Media, private equity (PE) firm KKR and Co.’s pan-Asian media platform.
According to Emerald Media, whose investments are primarily focused on India and Indonesia, the rapid convergence of media and technology has led to a lot of interest from PE firms. Edited excerpts:
Are we seeing a trend where large PE funds create venture capital (VC) arms, or small vehicles with dedicated teams, to look at some verticals that interest them but where deal size may not move the needle for them? Just like KKR has committed $300 million to back Emerald Media, we have several other examples in India—Everstone Capital supports Deepak Shahdadpuri’s DSG Consumer Partners. Quadria Capital has Healthquad for smaller deals. Verlinvest has followed this strategy in India and China, Northstar here in Singapore has NSI Ventures.
Yes, there are multiple examples of PE funds getting into sector-specific platforms. A few examples that come to mind are Warburg Pincus investing $300 million in Princeton Growth Ventures (PGV) to create a platform to acquire assets in TMT (telecommunications, media and technology) infrastructure or KKR floating Mandala Energy, a South-East Asia-focused oil and gas exploration and production company.
Similarly, Emerald Media, too, was established as a Pan-Asian media platform to focus on early- to mid-level assets with an investment size of $20-$75 million for KKR which otherwise primarily looks at large opportunities in excess of $100 million. These platforms are often led by industry veterans and are mostly created for sectors that need specific expertise. Early-stage investments need a lot of management bandwidth and involvement from these sector experts, who have seen this journey before and can help them as they enter the growth stage to become organizations of scale.
Emerald Media’s portfolio is India-heavy—is that an indicator of the lack of deal flows in Asean (Association of South-East Asian Nations) in the ticket sizes that you play in?
We had prioritized India and Indonesia, given the high growth rate and tailwinds in these markets. The typical deal flow in media, entertainment and allied tech that we have seen in these markets is between $30-50 million, which is our sweet spot. South-East Asia is home to more than 600 million consumers, with six primary markets—Singapore, Indonesia, Thailand, Vietnam, Malaysia and the Philippines—that stand out due to their growing economies and a rising middle-class consumer. We are now in the process of broad-basing our footprint into these SEA (South-East Asian markets). While these markets are seeing an aggressive deal flow in e-commerce and related pockets, they also have a steady deal flow in media and related technology with a sweet spot between $15-25 million.
Big picture, when it comes to new-age independent media, how bullish are you on India? How big a factor is technology when you make your investments?
The Indian M&E (media and entertainment) industry is growing at 15% CAGR (compound annual growth rate) and is expected to double in size over the next five years. Technology today is disrupting the way media is consumed and it is important to invest in assets that are at the forefront of this disruption/convergence. Today, rapid convergence of media, entertainment and technology is interlinking content creation, distribution and consumption experiences. In this environment, cloud-based services will drive content faster from creation to consumption and will redefine movement, management and distribution of content. The reason is simple; it is far more flexible and effective. OTT (over the top), too, will soon become mainstream, driven by personalization of content, delivery and real-time access on multiple devices and platforms.
Instant consumer analytics will become indispensable. Technology will continue to disrupt the traditional ways of buying and selling advertising as programmatic, geo-targeting, day-parting becomes the new normal.
TV and digital measurement will get unified in due course as marketers look for cross-platform strategies. Sectors such as immersive content (virtual reality/augmented reality), though still in its early days, will play a big role. Though no research studies can really estimate the potential of this for now, this will be larger than any other format in the years to come.
As our portfolio demonstrates, we are very bullish on media and related technology in India. Our current assets in India include Endemol Shine India, the country’s largest independent IP (intellectual property)-led content firm; Graphic India, a premium character entertainment firm with 100+ existing IP properties; OML, a leading live entertainment firm focusing on the youth market through festivals, concert tours and content creation; Fluence, India’s first and largest digital celebrity network producing exclusive celebrity-led content including video, voice and games; YuppTV, one of the world’s leading OTT content player for South Asian content, live TV, video on demand, and on-demand movie solutions; and Amagi, a next-generation media technology firm providing cloud-based, managed broadcast services and targeted advertising platforms to customers worldwide.
The $300-million commitment from KKR that you have, by when do you see Emerald Media utilizing this corpus, and post that, what is the way ahead?
It has been 18 months since Emerald Media started deploying capital. YuppTV and Amagi have been our first two transactions from this corpus. We have a healthy pipeline, which should help deploy the entire amount by the end of next year. Our focus right now is to help grow the investee companies and create a robust portfolio of assets.
Apart from India, the other prominent country in your portfolio is Indonesia. Big picture, will Indonesia deliver for PE?
Indonesia is a very attractive market, given its young and digitally connected population. The structural backdrop of Indonesia is very compelling, the GDP (gross domestic product) per-capita is still increasing by 8.2% per annum (i.e., 2.5 times as fast as US), which represents a distinguishing feature in today’s times.
Indeed, with half its population of 260 million under the age of 30, private consumption as a percentage of GDP already totals 58%, a figure that we think could increase another 5-7% in the next decade. Government funding for infrastructure projects, too, has jumped by 20% in the latest 2017 budget, and it stands at 2.5 times of what was allocated just three years ago. Without question, these trends are constructive for investments in sectors such as media, tech, healthcare, education, e-commerce, food safety, transportation, payments and housing/financial services. Similar to what we have seen in other big emerging markets, we believe there is a clear opportunity for investors to use PE to arbitrage the public equity markets. For example, in Indonesia, the public equity benchmark actually has a 0% weightage to technology, one of the areas we find most compelling in the region. So, if we are right about the growth trajectory of areas like e-commerce, mobile payments, and logistics, then large institutional investors will want to gain private exposure to areas of the economy that actually capture the bullish GDP story.
PE has been on the comeback in India in the past three years. We are seeing a lot more commitments to India from several global funds, and local funds have also launched new vehicles. Is this a reflection of the confidence in the Narendra Modi government, or are several other factors at play here?
We have always been believers in India and, yes, the sentiment of the investment fraternity is definitely positive towards India. Clearly, after decades of uncertainty, there is a government in power with a full mandate. A stable government, a growing GDP, ease in regulatory environment and some visible long-term measures being put in place boosts investor confidence. And this confidence is reflected in the amount of capital being invested in India.
Big picture, for PE, how big a concern is valuations—be it India or South-East Asia?
While we have seen big-ticket investments happening in South-East Asia in the e-commerce space, when it comes to media, entertainment and related tech, the deal sizes seem to be between $15-30 million.
Typically, in the early stages, the promoter finds equity to be far more expensive compared to debt. The last couple of years have seen aggressive valuations for digital media and tech assets which are now slowly correcting themselves in line with global valuations. However, like other emerging markets, exit options remain limited.
How easy or difficult will it be to build new-age media firms in Asean that are not linked to or are independent from the traditionally strong media houses that most countries in this region have?
The internet has democratized the way businesses are built. There are better chances today than ever before to build out new-age businesses without the shackles of a traditional media business.
Most legacy businesses that were traditionally operating in straight jacketed verticals are today being constantly challenged.
In fact, most traditional media houses are struggling to reorient themselves to tackle the new-age media companies. For example, OTT platforms like Amazon and Netflix are shaking up the cable and broadcast business and satellite operations are being replaced by cloud. The lines between vertical businesses are blurring. Anyone with a good content idea today can directly reach out to the consumer by setting up a channel on YouTube or by creating an app and create a business model. This is a global truth, not only true to Asean.
What is Emerald Media’s investment thesis?
Emerald Media looks at multiple parameters while investing in any new asset, like current size and scale of the opportunity, market potential, competitive edge, exit scenarios and most importantly the promoter/senior management team.
Since we invest in the growth stage, our goal is to find rapidly growing companies, riding on key M&E (merger and acquisition) trends, looking not just for financial capital but also operational support and strategic guidance. Given our backgrounds in M&E investing and operations, we see ourselves as adding value to help the company grow and achieve its full potential.
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