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Homegrown private equity firm ChrysCapital, which has been operating in India for 20 years, is investing out of its eighth fund. So far, it has exited five funds and has returned the principal for its sixth fund. Its portfolio has not only braved the pandemic but also benefited from it, said the PE firm’s managing partner Kunal Shroff in an interview. Edited excerpts:

How has covid impacted your way of thinking?

The year ended way better than our worst expectations. Companies ended up generating good profits, in some cases record margins. Our portfolio ended up not just resilient, but benefited from this, because companies reduced rent costs, besides other measures. There was low growth but high operating profit growth. Obviously, hospitality, real estate, travel and restaurants bore the brunt. Financial services was a mixed bag—those with access to capital did well. They kept getting access to funds, and everything moved to better companies. IT and pharma had a great year after the initial wobble in the June quarter. It has managed to create a lopsided economy.

The second wave is here, not as mild as we had initially thought, and we could end up again in this zone where certain essential services such as pharma and IT end up doing well, as globally liquidity keeps going up and asset prices continue to stay up. So, one thing we have realized is that valuation multiples in certain sectors have only gone up.

Since the pandemic outbreak, what is your portfolio assessment?

We have been relatively shielded because of our focus on IT and pharma, which comprises two-thirds of our portfolio. We have done well. We’ve also consciously pivoted a bit towards the new economy, which we had not done much five years ago. We were late to the game and rightly so. We are not looking to do binary returns, we are not looking for too much risk. We want to do steady returns. So, our strategy for the new economy has been to find leaders in this segment and pay up... a company that is on the cusp of turning profitable and where unit economics is strong. Or, even if the company is small, but you are not going to have to keep pumping in money and neither is your competition being irrational.

These are two approaches we used in the new economy, which as a percentage of our portfolio has also moved up.

What is your strategy for new-economy firms?

For the larger established potential leaders, we want to make sure they are profitable, and unit economics is strong and the customer acquisition costs are not going to just keep going up. On the opposite end, when we want all these things to be correct, then you can’t get a cheap valuation. So, we will be flexible with valuation.

What may have appealed to some of these new-economy players is that we have been around for a while. We have been among the few firms that have taken multiple companies public. They feel maybe ChrysCapital can help them think of going public. That has worked in our favour. Second, we have also looked at smaller companies, where unit economics is there, it is profitable but on a lower scale. And because the competition is not irrational, there is a path to improving margins as you get scale. Those are the two approaches we are taking.

We don’t want money guzzlers, we don’t want to fight with others with deep pockets because this is one sliver of our strategy. We are not going to do 12 investments in the new economy from one fund.

Does fintech and edtech interest you?

They are interesting but the industry shifts quite a bit here. Things move very fast. If there is comfort that the variables on which we compete will be relatively steady, then we will have higher confidence. If there is a lot of changes, then we have to factor that in, either in terms of sizing the deal or pricing it. Edtech has done extremely well in certain segments. The confusing part in fintech is how much of it is financial services companies leveraging tech, as opposed to fintech.

That has been a bit of a challenge for us because we won’t invest in the HDFC Banks of the world. They are too large for us. But will they end up squeezing the most of the margins? Will they capture disproportionately better return on investment versus the companies that we are backing?

That is a little bit of a concern, while recognizing that leaders cannot eat everything, market shares are small in financial services and that there is space for others.

However, the question is in the middle of all the uncertainties, whether it is the loan moratorium or whether access to funds, is this the best time to jump in? Having seen the kind of recovery that has happened, we have started being open to relooking at this segment.

You have been decisive with the size of the funds you have raised so far. What do you think of billion-dollar funds?

We returned money in fund five because we had raised too much money and the environment was still difficult. We raised a smaller fund in fund six. The reason was at the end of fund five, we were making $40 million investments. We sized the fund according to where we thought the comfort level of our deployment was.

Today, that figure has doubled, in some cases tripled too. The annual investment pace has also moved up to over $300 million, so when you consider a 4-5-year investment cycle, a billion-dollar fund would make sense.

Are we able to do the things we want to? As we have seen, big IT, big pharma... they can absorb large dollars and deliver huge returns. The realization has been that large deals haven’t returned poorer returns, because in certain sectors, large is still smaller in the global context.

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