Mumbai: Creating alpha and producing returns should be the key driver for a fund to becoming specialized.
Whether to become a generalized or a specialized fund depends on various parameters such as returns on investments as a goal, core strength to focus on and how you can create the alpha, according to a group of panellists at the Mint India Private Equity Conclave held recently in Mumbai. One can be a generalist, but the specialization of sectors, understanding and expertise are what plays a key role for any type of fund, the panellists said.
A panel discussion on ‘What will and will not work in Indian PE—Generalists vs specialists; LPs competing with GPs?’ brought together Bala Deshpande, senior managing director, India, New Enterprise Associates India Pvt. Ltd (NEA); Shantanu Rastogi, managing director, General Atlantic; and Srinath Srinivasan, chief executive officer, Oman India Joint Investment Fund (OIJIF), among others.
“It is a stage of evolution. Everybody is generalist to start with. But over a period of time, you start to relate yourself that you are understanding and have attraction towards a particular subject far more than others. That is where you choose your sectors," said Rakesh Sony, director and India head of US-based investment firm Proterra Investment Advisors, a food- and agri-focused private equity fund with over $2 billion of assets under management.
About the difference between specialist and generalist funds in India as compared with other geographies, Bala Deshande of NEA said, “Specialization has been the ability to have knowledge of what will work in the sector in the next five years, where lie the opportunities and can you be ahead of the curve."
“It is more knowledge. It is more to drive the alpha and returns which is really what I feel specialization should mean. In India, we are generalists, but we have picked that nugget from NEA that let’s build specialized knowledge in healthcare and in enterprise tech even for India, so that while we will be general in our approach because the market lacks the depth, we should have the knowledge in a specialized way," she added.
Shantanu Rastogi of General Atlantic, said specialization and understanding a sector at a global level bring a lot of value to boardroom discussions and firms, given that most firms are becoming global, be it in talent, technology disruption and supply chain across all sectors.
General Atlantic, which has invested about $2 billion in India since 2002, globally focuses on financial services, healthcare, technology and consumer.
“We think we are a generalist, but a specialist in few sectors. We can’t focus on all, of course leaving aside real estate, infrastructure, and keeping our investment return as a goal. And that is an important thing to decide when you want to be a generalist or specialist; you are playing a return game as well," said Srinivasan.
He further added that OIJIF’s core confidence lies in sectors such as financial services, industrials and consumer and it would want to chase that particular segment in terms of trying to generate returns. “We switched from generalist to specialist and then again are thinking what determines a specialist. Maybe our economy is maturing and there is depth available for us to think in those terms. But we want to be a specialist in a few areas rather than just one area," he noted.
Meanwhile, discussing the thought process during the structuring of a fund as specialist or generalist, Suresh Prabhala, partner at PE firm ADV Partners, said the firm which raised its $600 million fund in 2014 decided to go pan-Asia, instead of focusing on sector specialization in India because of two keys reasons: their own skill sets based and other is to tap into the interflow of capital, product, and service between various nations.
“Since 2003, I have been operating in Asian top funds. From our ability to allocate capital across countries and the ability to stay out of a few countries when they are not doing well, that was a very important discipline when we were in the larger pan-Asia platforms. We wanted to continue to have that discipline. The second thing was effectively the interplay between various countries…We felt that the large consumer base within Asian countries which could actually benefit from each other and therefore our fund is structured to originate investments in independent countries but ultimately make cross border interactions work," Prabhala added.