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Kunal Shroff says one of biggest issues global investors raise about PE in India is the lack of exits and poor returns. Photo: Manoj Verma/Mint
Kunal Shroff says one of biggest issues global investors raise about PE in India is the lack of exits and poor returns. Photo: Manoj Verma/Mint

Excess returns a challenge unless all stars are aligned: Kunal Shroff

The ChrysCapital Investment Advisors managing director on his firm's investment plans

Mumbai: ChrysCapital Investment Advisors managing director Kunal Shroff took charge as lead partner at the firm in January and now oversees strategy, fund-raising and investor relations. He joined the firm in September 1999 after quitting a job in New York with hedge fund Chilton Investment Co. During his 16-year stint at ChrysCapital, Shroff, a computer science graduate from Cornell University, has led investments across sectors, including information technology, infrastructure and financial services.

Edited excerpts from an interview:

ChrysCapital is reportedly raising a new fund this year. Have you firmed up a target corpus?

ChrysCapital is currently investing Fund VI (ChrysCapital Fund VI LLC). We will start fund-raising for the next fund very shortly and will target a fund that is similar in size, maybe a little larger than the current fund.

How have exits shaped up for the firm?

The last few years have been very good for investors. Just in the last year-and-a-half, ChrysCapital has returned over a billion dollars in gross proceeds across funds. Last year, we closed out Fund III with the exit of Intas Pharma, which delivered a 17X return in rupee terms (ChrysCapital continues to have an investment in Intas through Fund V).

This year, we are on track to close out Fund IV with the exit from Mankind Pharma. Thus, four funds will have successfully been closed out with strong returns. With further exits in Fund V, that fund has now returned the entire invested capital back to investors and the remaining portfolio will provide additional upside as it is monetized.

We are told this consistent outperformance across all funds would be unprecedented not just in India but in most emerging markets.

When do you expect Fund VI, raised in 2012, to be fully invested?

Based on current plans, Fund VI could get fully invested by middle of next year.

Have you made significant changes to your investing strategy in Fund VI?

First of all, we targeted a smaller fund, which would be better suited for delivering excess returns in the Indian context. Fund VI is a $510 million fund, compared with Fund V, which was originally over $1 billion. This has allowed the fund to deploy capital patiently and, based on current traction; the portfolio seems to be shaping up well. Information technology, financial services and pharma continue to remain the most active sectors. In these sectors, we have expanded the sandbox further in Fund VI. We have also reduced the coverage of the infrastructure sector and are actively building coverage of the consumer sector and, more recently, the manufacturing sector. Investors have given ChrysCapital the flexibility to invest in both private and listed companies. This is extremely important in the Indian context, where there is a high correlation between public market valuations and capital raises in private companies. The sector approach is complemented with a top-down strategy of evaluating listed companies and identifying themes, which helps generate investment ideas. A few of the Fund VI investments have emerged from this analysis. Over time, this strategy could also help expand coverage beyond the core sectors as it generates ideas across industries.

As lead partner, how has your role changed in the firm?

We are a small and tight-knit organization. The partners and directors have been working together for over 10 years. As lead partner, my goal is to provide direction and manage the organization for the future—thinking about new initiatives, areas to expand into, people management. Since we all have been working together for a long time, this takes a collaborative approach, leveraging everyone’s strengths. I also oversee fund-raising and investor relations. Earlier, I was leading a few sectors, but now I play an overseeing role across all sectors by assisting the sector teams in investing and portfolio management.

How does the firm operate differently today, compared with four years ago when Ashish Dhawan was on board?

We have retained many of the frameworks—the proactive sector-driven approach, taking a contrarian view at times, maintaining a sharp focus on exits. These have led to our success from early days. The changes are more in the nature of modifications to our consistent strategy that has worked well for us over the years. We currently employ a collaborative approach and a more institutionalized framework for investments and portfolio management. We are also leveraging industry experts and external consultants more often than before as a way to enhance due diligence capabilities as well as portfolio engagement. We have also deepened the engagement model with potential investee companies to get to know the entrepreneurs better and evaluate entrepreneur alignment as part of the diligence process. Over the last few years, we have entrusted our directors with additional responsibilities such as deal sourcing and business development. Traditionally, investment recommendations were made by the partners only; but, recently, we also empowered our directors with a say in investment recommendations.

What are the two-to-three big challenges PE investors in India face today?

One of biggest issues global investors raise about PE in India is the lack of exits and poor returns. Of the capital that was invested four-to-eight years ago, it is estimated that almost 75% remains un-exited. This creates a portfolio overhang as funds have to manage a large set of investments in addition to looking for new opportunities. Consequently, fund-raising is not getting easier. Investors are also a little cautious on the macro environment in India. Some of the exuberance, post-elections, has reduced, as investors are evaluating the economic situation on the ground and trying to gauge the confidence level of companies and entrepreneurs. Overall corporate earnings growth was subdued in FY15 and is expected to remain weak in FY16 as well.

Finally, India is still considered an expensive market for investing, where certain sectors command very high valuations and delivering excess returns becomes a challenge unless all the stars are aligned.

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