MUMBAI: Atul Kapur, co-founder and chief investment officer (CIO), Everstone Group, in a conversation with Mint, talked about sectors that private equity (PE) firms are focusing on amid the coronavirus-led disruption, how the pandemic will likely change investments in the consumer sector, the impact of the pandemic on the PE industry and Everstone's interest in private credit investments. Everstone Group manages over $5 billion in assets across private equity, real estate and infrastructure.
As control investors, what actions have you taken to help your portfolio companies to weather the covid-19 disruption?
In our experience, it is not the best companies that survive, but the companies with the best balance sheet do. No matter how good a product or service you may have, if your balance sheet, in a time like this or any global dislocation, is not appropriate then you may find it difficult to survive. So, our first reflex is to always control the balance sheet and make sure that the debt is manageable, the liquidity is substantial and if it is not, then how do we as the owners provide the liquidity.
What sectors do you think will see more PE interest in the current environment?
In our view, IT and healthcare sectors will get a disproportionate level of focus from PE firms in the current environment. No matter what company you are, what product or service you have, going digital is going to be an imperative. We think that IT services companies that are natively digital, which help other companies go digital and maintain their digital presence, present a massive growth industry. Within the IT services industry, we believe that another crucial area of focus is cyber security. As the companies put more of their data on cloud or engage more with their customers in a digital mode, the next leg of growth will come through cyber security. Given the acute focus covid-19 has brought to healthcare in general, we feel that private equity will also be focused on making investments in the sector – across pharma, services and devices.
Financial services, especially NBFCs (non-banking financial companies), have seen a lot of pain in recent times. Are PE firms still keen on investing in NBFCs?
If I have to hazard a guess, 20-25% of NBFCs at the bottom of the pyramid could perish due to their inability to raise adequate capital from banks or if they do not have the right sponsorship. The well capitalised and properly sponsored NBFCs will take away the market share. A lot of pain is expected in financial services, however, if you have dry powder and capital then you won’t be affected that much. We feel that most of the money is made during downturns in some sectors. While the approach of many people towards the NBFC sector might be negative, we continue to remain extremely positive on this sector.
How is the pandemic going to impact PE investments in the consumer sector with consumer behaviour likely to change, at least in the near term?
If I think about consumer behaviour over the next two years, I feel there will be a downtrading into essentials and the prestige products are going to be soft. Over the last 10 years, everyone had been pushing upwards towards prestige products, trying to premiumise and get more value out of their customers. I believe we are at the other end of the cycle now. Everything is going to trade down for two years. We will assess the segment of consumer we want to play in very carefully as traditional distribution methods are also getting disrupted. While we remain bullish on the consumer sector, we have switched our focus to essentials instead of premium/prestige products.
Is dry powder the biggest differentiator today and will the pandemic lead to churn in the PE industry?
Dry powder is always helpful and if you are caught in a dislocation with no money in your fund to support your companies, then you are in a pickle. Availability of capital is absolutely critical in times like these. This dislocation may lead to a cleanup of the sector. The absolute number of funds on the smaller side of the market may shrink whereas the top-tier funds should be fine. I worry about the $50-400 million funds who do early-stage, e-commerce and growth, because there is less liquidity for exits in that segment. Such funds invest in smaller companies that tend to have disproportionate problems. Every time there is a dislocation in the market, the big becomes bigger and then, the bigger funds take away a disproportionate amount of capital from the market.
Is credit an attractive opportunity right now? Are you looking at it?
Everybody gets excited about equity, but it is credit that greases the economy. If you look at the global funds, the amount of credit that they manage dwarfs the amount of equity that they manage. We love credit and have expressed credit through the NBFC (IndoStar Capital), which we built from the ground up as well as Hinduja Leyland Finance, which we have exited. I think that distress in both corporate and real estate credit has just started. We are really excited by the real estate distressed credit cycle. The current situation is pretty bad for the sector with significant inventory and poor liquidity. We have a team that is ready to go, however, we are waiting for the world to open up a little bit.