Verlinvest says exits are hard to come by, and was a big cause of concern for investors who have committed capital to India.
“Exits these days are mainly IPOs (initial public offerings) because secondary deals are not happening, and that is the big issue. Strategics are going to be coming in a lot more, but we need to get companies to a size where strategics can look at them," Nicholas Cator, executive director of Verlinvest Asia, said in an interview. Edited excerpts:
When we look at your Asia investments, India forms a big chunk of it. How did you start focusing on India?
India is the first Asian country we have invested in. Back in 2008, we made a strategic decision to invest in Asia, and we began looking at India and China. If you look at ABI as a group, not much of the revenue and Ebitda (earnings before interest, tax, depreciation and amortization) were coming from Asia. So, from a family diversification view, it made sense to be present in Asia. We started looking for partners in India and China, as initially, we did not want to invest in these countries by ourselves to avoid mistakes.
These are not the easiest countries to invest in, and if you are investing directly from abroad, you might end up seeing only deals that nobody else wants. We started looking at India first because it was an easier market for us to invest from Belgium, as compared to China, given English is the working language.
We met a number of PE funds in India, and decided that we would invest in Everstone (Capital Management), and we also did co-investments with them, including Sula (Vineyards Pvt. Ltd) and F&B Asia (Ventures Ltd). Then, over the next 3-4 years, we built our own network, and were in a position to look at opportunities where we could make direct investments—this led us to investing in Kishore Biyani’s Future Consumer and Future Retail. Since we opened an office here in Singapore about two-and-a-half years ago, it has been easier for us to do direct deals. But if you look at our portfolio today, India is clearly more than half of our portfolio in Asia.
If you look at India, as soon as you get above $50 million, it gets too expensive, and so the idea for us was to come in earlier into companies.
Of course, we can hold investments for 5 to 10 years as we are an evergreen fund. So, we felt that a partnership with Deepak (I. Shahdadpuri, DSG Consumer Partners) would let us do a number of co-investments at a much early stage, but would still enable us over 2-3 rounds to reach our milestone of a $50 million investment per company.
Many of the deals that you have done with DSG Consumer Partners are early-stage deals. Do these companies have the potential to absorb a $50-million deployment?
Yes, in three or four years. We like the dairy space in India, companies like Drums (Food International Pvt. Ltd)/Epigamia have the potential to deploy at least $20-25 million. But for these companies, we can ultimately also look at acquisitions, because for us, it makes sense to back a team over the long run and look at potential acquisitions with that team. As for education, we have looked at it for many years in Europe. In Europe, you have more public actors and it is often a real estate game. We felt that education had a lot of potential in Asia, and so have done three deals to date—Xseed, ChangedEdu, and Byju’s is the last one.
How do you see deal-flow in India as of now? You are in a sweet spot because you do $15-to-50 million, and that is the pain point in India. You are also in a space where not many venture capital firms are active.
There are not as many deals in the sectors that we are interested for India as of now. Most of them are pre-IPO deals where you come in and they are going to list in a month, or in a year. For us, this is not our favourite space—as we like to be long-term business partners. You will see many more larger deals in software services and e-commerce, but it is different for F&B (food and beverages) where there is not much deal flow.
Healthcare services is another sector we are interested in, but we feel we don’t want to start investing in India in this space just yet.
For India, we are in e-commerce, education and F&B. In education, there are quite a few opportunities and we see quite a lot of deal flow. For us, we are fine to do minority deals between $15-50 million as we get to deploy capital over time, build strong relationships with the team, get to know the team, know how they work, and increase the size of our investment over multiple rounds.
For me, to come in and put $50 million in a promoter-led company, with whom I have no pre-existing relationship prior to an auction process, is more difficult.
Hence, we are looking more for majority deals for larger transactions. We are very active in our companies—we are on the board of all of companies for example, and we want to be a part of the strategic thinking and direction.
For your existing investments like Byju’s and Xseed, are you in a majority position?
We have a board or observer seat, and the difference in e-commerce or education is that we don’t necessarily want to be in a majority position.
You want a strong founder and successes come when there are a pool of investors in a company.
But F&B is very different. If I were to buy a dairy business in India today, and I would invest $50 million, I would rather buy control in the business. This is not to say that we won’t do minority investments. But our investments in F&B in India have generally been in joint majority—with Everstone, we are in joint majority in Blue Food, joint majority in F&B Asia, and with Reliance and Visvires in Sula, and jointly it gives us a majority. With Kishore Biyani, it is a public company—so it is quite different, but we are on the board of Future Consumer (Ltd).
How about valuations in India ?
It is crazy. From what I see, valuations in India have always been higher than in Europe or the US. There is a lot of expectation in future growth, and today if you see the markets have gone even higher. For me, they are too high. Valuation also depends on the sectors—F&B is expensive but e-commerce is slightly less expensive than it was 3 years ago.
Last year, many VCs slowed down and took a re-look at their India investment strategies. But you did not do so.
We are a long-term fund and we like to deploy money every year. It made sense for us to enter the education sector as it ticked a lot of our investment criteria. India has not really slowed down if we look at growth. If you take out the demonetisation effect last year, it is still growing strongly. A lot of funds slowed their investment pace down to review their India strategies, but for us, India will be one of our key geographies for the long term, as it has all we look for—rising level of income in middle class, rising level of education and strong fundamental demographic factors. However, it has not grown and matured as fast as we had hoped and valuations are high. For us, we look at the macro aspects and also at the team and growth potential. For us, a good company and a good team will also be able to perform in a sluggish market.
How do you see the exit scene in India?
It remains the hardest thing in India. It will be interesting to see how many exits happen this year and how it improves over the next few years, as this is a big cause of concern for many potential investors, LPs (limited partners) and GPs (general partners).
Exits these days are mainly IPOs because secondary deals are not happening, and that is the big issue. Strategics are going to be coming in a lot more, but we need to get companies to a size where strategics can look at them.
Strategics are not interested in looking at $20 million deal—it does not make sense for them. They want it to be of a sufficient scale so that it makes sense for them.
Look at old vintage funds in India—you have not many that have been able to sell all their investments. Funds in India are moving away from minority investments to majority investments, especially as it is very hard to secure a full drag on an Indian promoter—ultimately you secure your right to exit, or your right to an IPO. But if no one wants to buy your stake because it is a minority stake, and the right to an IPO will ultimately not be easy because you are subject to the markets and you can’t sell the whole business. There are loads of business in India where I would buy them if I can get 100%—but if it is to buy it from an investor who owns 32%, and has been stuck there for 8 years without an exit, I know that I will face the same problem in the future, if I enter that company.
Even consolidation is not always the answer. It depends on the sector. If you look at F&B in India, there are not that many brands that one can buy and combine, as small fast-growing brands are also very expensive. So for us to do the consolidation game, and with the current valuations, it would be very difficult to find an investment strategy that would deliver strong returns, where you buy small brands and pool them together. The valuations that you are paying to get in is huge, too, because many of the smaller brands are backed by VC investors, and many of them are looking for high returns.
When do we see a mindset shift among VCs—there are very few VCs that invest in spaces like F&B and education—and most of them stick to tech. Start-ups in such sectors are too small for PEs. Despite the opportunity, why are VCs not jumping on board when it comes to consumer businesses of the non-tech variety?
From our investment perspective, we like brands, and it made a lot of sense for us to start looking at the F&B space in India. If we look at any deal in India in this space, it is always going to be the same 3-4 investors—there will be DSG Consumer Partners, Sequoia, one or two others and us.
If you want to raise between $15 million and $50 million, then there are even fewer options to go to. For us, we clearly see the branded F&B space as an opportunity, especially with rising income levels. But you’ve got to find local brands. Bringing international brands to India without changing the product has never worked. DSG Consumer Partners has a great reputation—if someone were to look for seed- or early-stage funding in F&B, then Deepak Shahdadpuri is the first name that will come to mind, and then maybe they will think of Verlinvest. I think there are not enough large companies in the F&B space today to attract larger investors like L Catterton or others. Look at Sula Wines. Is it big enough to attract large strategic players?
Maybe. But Sula is only $75 million in revenue, and not yet big enough for all large investors. So to have an Indian fund fully dedicated to larger F&B deals, you need to start seeing more large deals, including large secondary exits.