AVCJ Awards 2020: Deal of the Year - Large Cap: Jio Platforms
Jio Platforms has attracted an array of global investors as its digital ecosystem designs come into focus. L Catterton Asia adds consumer clout to the infrastructural proceedings
Jio Platforms, an internet and telecom company owned by India’s Reliance Industries, raised about $20 billion this year, with 11 private equity investors pumping in $9.9 billion following commitments of $5.7 billion and $4.5 billion from Facebook and Google. Although all the names on both sides of the table were well established, this was in some sense speculative, early-stage investing.
As the parent of Reliance Jio Telecom, India’s leading mobile carrier with 387 million subscribers, Jio Platforms is viable investment in its own right. But the ultimate goal here is to transcend the telecom business itself by getting a chunk of India’s first consumer technology ecosystem provider in the mold of China’s Alibaba Group or Tencent Holdings.
This is hoped to be realized through crossover operations with another Reliance subsidiary, Reliance Retail, a ubiquitous brick-and-mortar operator which itself has raised more than $6 billion from many of the same investors. Much of the plan revolves around networking unbranded mom-and-pop stores and Jio-branded convenience stores with the online JioMart e-commerce platform. Inventory will be handled by Jio-owned warehouses.
For Reliance Industries, the $20 billion round was all about debt reduction. The conglomerate bet heavily on its own retail and telecom assets in the early 2010s, when investors were still wary about the feasibility of transitioning from a petrochemicals and energy-focused past into a consumer tech future. The plan was to reach zero debt within 2020, which was achieved on schedule. By mid-2020 Jio was a roughly $7.5 billion revenue and $3 billion EBITDA business.
Strategic support
The large commitments from Facebook and Google are noteworthy not only in their timing – COVID-19 was becoming an increasingly inescapable local issue – but also given the companies were relatively inexperienced India hands. Facebook had only made its first investment in the country the year before, when it backed social commerce start-up Meesho.
Google set up shop in the country in 2004 but its first local start-up investments didn’t come until late 2017. These were funded by channeling about $165 million into the tech giant’s local subsidiary – the first cash infusion Google India had received from headquarters since 2008. The Jio investment in July 2020 was made via a $10 billion India fund announced immediately prior to the deal.
Early strategic support for Jio also included a partnership with Microsoft’s cloud business Azure. Microsoft was said to be considering a $2 billion direct investment as recently as November. Among the private equity contingent, tech-focused investors included Silver Lake, General Atlantic, Intel Capital, and Qualcomm India.
Reliance’s energy heritage doubtlessly facilitated participation by government-connected entities in the Middle East, including Saudi Arabia’s Public Investment Fund, Abu Dhabi-based Mubadala, and the Abu Dhabi Investment Authority. Meanwhile, generalist PE representation came in the form of KKR and TPG. Interestingly, there was only one mid-sized private equity firm: L Catterton Asia.
“Although it was a fully priced deal, underwriting this transaction was not difficult, based on our assessment of what Jio’s telco business can deliver, with the returns from the digital services ecosystem providing additional upside to the base case,” says Chinta Bhagat, a managing partner at L Catterton Asia. “After all, we’re not telecom investors – we’re consumer investors. It is unlikely we would have been the right investors for this deal if this was purely a telco bet.”
While L Catterton’s interests are focused on the consumer side of the Jio plan, it recognized that it was Reliance Industries’ expertise in efficiently rolling out infrastructure in developing markets that made Jio an interesting prospect. Alibaba and Tencent didn’t have to lay fiber to create their empires. In India, this is a real bottleneck that arguably positions Jio ahead of other potential ecosystem makers locally such as Amazon and Walmart-owned Flipkart.
“Reliance has always been focused on profitable growth, which runs counter to the market practices exhibited by most of the tech ecosystems that have been built around the world. Those tend to have extensive periods of time where they lose money to acquire customers and build scale,” Bhagat says.
“In the case of Jio, instead of the money being used to acquire customers at less-than-marginal cost, it was invested in building critical data infrastructure at high quality but very low cost. That way, when the customer acquisition began, they didn’t have to give away the farm.”
The big rollout
L Catterton’s consumer and retail expertise – the firm maintains strong ties with luxury goods giant LVMH – are expected to come into the equation as Reliance’s “new commerce” strategy of ecosystem creation comes together. This has included more than 10 acquisitions to date in parallel verticals such as events ticketing, media, grocery, payments. A partnership with Facebook’s WhatsApp messaging service was agreed in April.
The buildout has proceeded with a uniquely collaborative online-offline approach to digitization that caters to the realities of India’s largely unorganized economy, where traditional neighborhood stores account for 11% of GDP and 8% of employment. “If you do in India by way of disruption what Amazon has done to mom-and-pop retailers in the US, India will become unlivable just because of the job losses,” Bhagat says.
For L Catterton, the biggest concern going forward is macroeconomic. India has been hit harder by COVID-19 than any other country in the region, which has had some negative impact on Jio’s wireline business. But the very fact that India is behind the curve in Alibaba-style ecosystem creation means Jio could return 2-3x on investment within five years, when the company is expected to go public at a valuation of $150-200 million, or roughly the same size of Reliance Industries today.
“In a market like India, the biggest bottleneck to growth continues to be infrastructure, and businesses that find a way to create privileged access to infrastructure are the ones that win,” Bhagat says. “In building out its network, Jio has created probably the highest performing, at-scale pieces of infrastructure that exists in India today, and as a result, the rate of displacement from offline to online is going to be greater.”
Pictured: Chinta Bhagat of L Catterton Asia
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