Mumbai: Having invested $2.5 billion and made $5 billion worth of exits across two decades, ChrysCapital has emerged as one of the largest homegrown private equity firms in India. In April, the PE firm and its investors bought 10% stake in Mankind Pharma Ltd for $350 million. Managing partner Kunal Shroff spoke about how ChrysCapital clinched the Mankind Pharma deal at the last minute and investment opportunities that have opened up in the distressed space. Edited excerpts from an interview:
We are seeing a lot of interest in distressed assets even from pure-play private equity firms. Is this something which ChrysCapital is also exploring?
ChrysCapital does not intend to be directly involved in the process laid out by the insolvency and bankruptcy code since the process is still evolving and, in any case, the firm does not focus on over-leveraged sectors. However, ChrysCapital does evaluate investment opportunities in the distressed space in multiple other ways. For example, there may be a distressed parent company with a well-run subsidiary, where ChrysCapital could acquire the subsidiary and the parent could use the proceeds to de-lever at its level.
Similarly, the firm could work with a strategic partner to acquire a distressed asset that could become very valuable once turned around. And lastly, the firm may consider backing an asset reconstruction business.
You recently wrote a big cheque for Mankind Pharma which came as a surprise given there were other entrants at a fairly advanced stage. How did you clinch the deal despite being a late entrant?
ChrysCapital has known Mankind and its founding family for over a decade, having invested in the company in 2007 from ChrysCapital IV. During this eight-year relationship, ChrysCapital had the opportunity to work closely with the founders and management of Mankind and held them in utmost regard.
The team continued to monitor the company’s progress and remained in touch with the company even post ChrysCapital’s exit in 2015. I won’t get into the process details, but in the end, ChrysCapital’s experience in the healthcare space, along with its ability to add meaningful value to portfolio companies, allowed the fund to clinch the deal despite not being the highest bidder.
You have not really invested in pure-play consumer firms. Why?
ChrysCapital has actually been very active in the consumer space; however, for various reasons, the firm has closed fewer deals in consumer than in its other core sectors. At times, the investible companies have not scaled up sufficiently and so the call is to wait for the next round. At other times, valuations have been a challenge. The strategy that has worked well in other core sectors is to be selective and build conviction to pay up for the good companies. India has tremendous potential in the consumer space given the demographics and under-penetration in several categories and one should expect to see many home-grown successes over time as companies scale up and solidify their brand/franchise value. I believe it is only a matter of time before the sector gets its due at ChrysCapital.
Private equity firms in India are increasingly tilting towards buyouts. Will we see ChrysCapital doing more buyouts too?
ChrysCapital’s approach is led by sector and focuses on the quality of the management and the company. In fact, if you look at where the private equity industry has had its successes, you will see the ChrysCapital core sectors featuring prominently—but the returns have been equally good on minority as on control deals. So, the firm is flexible on deal construct, and engagement and value-add remains strong regardless of whether the deal is a minority or a control deal.
What has changed is that vs. 10 years ago, there has been increased deal flow on the control and large ticket deals as entrepreneurs have been more open to selling out partially or fully for various reasons including succession planning, generational compulsions as well as debt paydown elsewhere in the promoter group—and ChrysCapital is clearly positioned to participate in these opportunities. In several sectors, ChrysCapital has professionals with two to three decades of industry experience prior to joining ChrysCapital. This industry operating experience is further augmented by ChrysCapital’s network of industry experts that the firm can tap into as needed. So, clearly, ChrysCapital has the wherewithal to take control of companies, manage them, grow them, and successfully exit them. In fact, the recent sale of LiquidHub, one of Fund VI’s control investments, to CapGemini for ~$500 million, was the largest trade sale by any India-focused PE firm.
How has ChrysCapital managed get out of founder Ashish Dhawan’s shadow? Anything in particular in the last five years when you took charge and has sharpened the philosophy?
There are lots of lessons learnt from an investing standpoint as well as an organization building perspective. One can’t invest for 20 years without making mistakes, and ChrysCapital clearly has its fair share of them, which has provided invaluable insights and learnings.
Two big lessons that I think has made us improve over time are one, It is better to avoid certain sectors that have weak ROCEs or poor governance—ChrysCapital did make mistakes here in the past but thankfully, the winners more than made up for the losers; the firm’s focus has become sharper in the last five years; and two, large ticket deals—we used to believe that the $100+ million deals had poor return potential and should be avoided, but when one looked at the data, we noticed that in the core sectors, large deals have also generated strong returns and so over the last few years, ChrysCapital has selectively been open to deals larger than $100 million. The recent Mankind investment is an example of that.