Private equity firm Avigo Capital Partners has typically invested in companies that make vaccines, hoses and semiconductors. Now, it has invested in the youth garment brand Spykar Lifestyles Pvt. Ltd, thereby joining the club of PE investors eager to tap consumer-driven businesses.
This is New Delhi-based Avigo’s first investment in a consumer business; 25% or $31 million (Rs127.1 crore) of its $125 million India-specific Avigo SME Fund II will go to this segment. In all of 2006, consumer-driven businesses accounted for 17.17% or $391 million of the total $2.27 billion PE investments received by Indian companies, according to US-based financial data provider Thomson Financial. In the first half of this year alone, $275 million in growth capital has already gone to 13 consumer-driven companies—making it 20% of overall deal spend.
Three years ago, not too many investors saw consumer-driven businesses as a big opportunity. However, factors such as the BPO success story and a buoyant capital market environment have created a new category of middle-class spenders, leading to the growth of consumer-driven businesses in areas such as food, retail and entertainment.
Similar to Avigo, investors such as Sequoia Capital India, SAIF Partners, Matrix Partners and Norwest Venture Partners now have a specific focus on this opportunity.
“While 75% will be in old economy sectors, we see great potential in consumption businesses given the change in demographics in India,” says Saif Dhorajiwala, vice-president of investments at Avigo, referring to the fact that half of the country’s population, which is under 25 years of age, spends more than their parents do.
Last year, most of the consumer-driven investment went into consumer product businesses. Such investments include the $26.7 million investment in a subsidiary of Pantaloon Retail (India) Ltd, which sells electronics and home furnishings, called Home Solutions Retail Ltd by ICICI Venture Funds Management Co. Pvt. Ltd and Kotak Mahindra Bank Ltd, and Warburg Pincus LLC’s $8.5 million investment in Vaibhav Gems Ltd, a gemstone and jewellery company. The majority of this year’s funds, however, have gone into entertainment and leisure companies like UFO Moviez and Nimbus Communications.
The “hot” areas for investment related to consumers in 2007 will include retail and logistics, says Bimal Mody, director, private equity practice, Deloitte Corporate Finance Services India, which advises PE firms on deals.
Vishal Verma, manager at the private equity and M&A group at ICICI Bank Ltd, notes that there will be even more investment in retail if the government eases FDI norms. In 2007, investors have already spent $38 million on retail-related companies, including Spykar, compared with the $31 million spent in all of 2006, according to Thomson data.
Yet, investors eyeing the consumer-driven businesses say they do not look at whether the company is in retail or food as much as its business model and management. “The consumer-related businesses that excite us are typically in early stages of development in India,” says Vibhor Mehra, principal at Asia-focused PE firm SAIF Partners, “and have a business model that dramatically changes the way the product or services are given to the consumers.” SAIF has invested almost 50% of their $2 billion pie into consumer-related businesses in Asia. “Our basics of the business remain the same. We look for homegrown companies with strong management that at the same they have the skills to compete globally,” Dhorajiwala says.