Q&A: Tata Capital Growth Fund's Pramod Ahuja

Q: What is the nature of the Tata Capital Growth Fund's relationship to Tata Group?

A: We are a third-party fund and we raised money from multiple institutional investors, including Tata Capital. Our remit is to invest in growth opportunities in a sector agnostic manner. We do leverage the group across all four facets of PE investing. For deal-sourcing, we can tap into the vendors, suppliers and channel partners in Tata Group's vast ecosystem. We can also use Tata Group for deal evaluation - there are over 100 operating subsidiaries across 44 industries, so there is plenty of real-time, industry-relevant information available. We add value once we've made an investment by introducing these companies to the wider Tata network, thereby growing their sales and profitability. And finally, on exit, we believe that a Tata-sponsored entity, if it is being sold to a strategic or a listed business, may command some kind of a premium because the group stands for good corporate and ethical standards.

Q: What operational resources do you have - internally and through the Tata network?

A: In addition to our team of seven, which has experience in private equity, investment banking and consulting, we have operating advisors from inside and outside the Tata system. Once we have made an investment we get a board seat and then we also create an executive committee of the board. This committee meets on a monthly basis and it is not so much about having operating handle on the company as helping to set it on the right course. This might mean introductions to potential customers, right-sizing operations by increasing efficiencies, or doing comparative analysis with peers and seeing where the operating levers can be pulled in order to increase profitability.

Q: Do potential investee companies appreciate the nature of this value-add?

A: Promoters are now accustomed with what private equity does and in most cases they see the value we bring to the table. They have come to expect a certain level of interaction - a capability for outside-the-box thinking, the ability to add value - because businesses are becoming increasingly competitive.

Q: What investment themes are prevalent in the fund?

A: We have invested in nine companies and the fund is completely committed. These nine companies cover the three themes we identified when we started investing in 2011: urbanization, discrete manufacturing and strategic services. Urbanization is there for everyone to see. When we invested in Janalakshmi Financial Services (JFS) it was the sixth-largest microfinance institution (MFI) in India, but because of rapid urbanization and the need to fund people who are un-banked, it has become the largest MFI in the country. Another company we backed that plays to this theme is Home First Finance, which provides financing for low-cost housing. When we invested, also in 203, the loan book was $10 million; last year it was $90 million. These bottom-of-the-pyramid investments have played out well.

Q: What do you see as the next big opportunity in this area?

A: It is difficult to say. With any idea in this country, first-mover advantage doesn't last very long. JFS is morphing into a small finance bank; when we made the investment that was only in the back of our minds, but now it is becoming a reality. The regulations keep changing and in this case it has been favorable. The regulatory headwinds MFIs faced in 2010 with respect to the problems in Andhra Pradesh have turned into tailwinds. These institutions are not only recognized by the RBI [Reserve Bank of India] as a separate asset class, but eight of the 10 small bank licenses were awarded to the microfinance industry.

Q: What is the deal-sourcing process for discrete manufacturing?

A: We don't want to invest in companies that manufacture low value, high volume-type products because eventually that theme will play out; the EBITDA margins are lower and it isn't sustainable. We identified certain companies in the auto components and active pharmaceutical ingredients spaces where they are one of 2-3 suppliers to their customers. For example, in auto components Agile Electric Sub Assembly has a 35% global market share in electronic control throttle motors, a very specific kind of motor. Another filter we use is the management team. At Agile Electric the team is top notch and that gives us a lot of comfort on execution of the strategy going forward.

Q: And how about exits?

A: Fund I currently has a DPI [distributions to paid-in] of 18% and the TVPI [total value to paid-in] multiple was 1.8x as of March. We had our first full exit at the end of May - it was a promoter buyback of Standard Greases & Specialities, and it generated a 24% IRR. That was quite an opportunistic exit of an investment made in 2014. I expect our most common exit would be to sell to other, larger PE firms. We are actively monitoring 3-4 situations now where the business has become larger and it would need a group capable of writing a $100 million check as a single investment.

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