AVCJ Awards 2018: PE & VC Professional of the Year: Sanjiv Kaul

Though it has been 14 years since Sanjiv Kaul joined ChrysCapital Partners, he still describes himself as an "accidental drifter" into private equity. If not for a chance encounter at business school, he might still be working to build the international profile of India's pharmaceutical industry. 

While Kaul may have lacked formal investment training when he joined the firm, he has proven his value with a commanding string of investments in the pharma sector. They include this year's $325 million commitment to Mankind Pharmaceuticals that saw ChrysCapital return to one of its earliest portfolio companies in the sector. Altogether, his deals have realized nearly $900 million for the firm and helped establish it as one of India's private equity heavyweights. 

For Kaul, this record is a reminder that private equity success depends on far more than financial expertise. A profitable investment strategy requires a true alignment of interest between investors and the leaders of their target companies.  

"My core philosophy has always been that it's not just the business that I want to back, but rather the human angle – I need to develop a trust and confidence in the entrepreneur or promoter," he explains. "It doesn't matter whether, as an organization, we have a 3% stake or a 50% stake. The kind of activism and involvement that we do is like a partnership in the truest sense of the word."

Crossing over

Kaul was already well-known in Indian business circles before he began his second career in private equity in 2004. Over the previous two decades as the head of international sales at domestic pharmaceutical manufacturer Ranbaxy, he had grown the company's global revenue from $9 billion to $900 billion. The success established Ranbaxy as the first true homegrown multinational and put India on the map as more than a location for contract research and manufacturing services by offshore firms.

But as Ranbaxy settled in to build on this foundation, Kaul got a call from ChrysCapital founder Ashish Dhawan, who he had met in 1998 while taking a sabbatical to return to business school. Kaul had cultivated the relationship, hoping it might result in an investment for Ranbaxy; instead, the friendship led to an invitation that would propel Kaul into the next phase of his career. 

Kaul's first encounter with investing had come a couple of years earlier, when a friend asked him to invest in a pharmaceutical company he had started. Though at that point Kaul had almost no experience with financial products, he recognized the market opportunity and was impressed by the founder's entrepreneurial drive. His faith, and the commitment of a significant part of his life savings, were rewarded in 2004 with a 35x return in rupee terms that made Kaul financially independent.

Around 2002, another opportunity arose to test these investment instincts, when his father, who had recently retired from government service, asked for advice about his pension. Expecting him to recommend a safe bet on Ranbaxy, Kaul's father was surprised when his son instead pushed him to back in Sun Pharmaceutical, a recently founded start-up in Mumbai. Once again, Kaul's pharma sector knowledge and character assessment paid off; his father has made a nearly 100x return in rupee terms since his initial investment.

Having tasted financial success with these initial forays, Kaul was receptive when Dhawan made him the offer to join ChrysCapital. The founder was coming from the opposite side of the equation, wanting to bring in a senior figure with an operating background to enhance the financial expertise of his still-new team as it struggled to establish itself.

"It was quite a bold move for Ashish to bring me on board, because I was the first operating manager in India to join the private equity world," Kaul says. "Until then that world was basically managed by former consultants or investment bankers, these youngsters who essentially came from a financial background."

Transitioning into private equity required a number of adjustments from Kaul. For one thing, his new industry was much younger on average than he was accustomed to – at 47, Kaul had been one of Ranbaxy's youngest executives, but at ChrysCapital he found himself surrounded by colleagues in their 20s and 30s. Even Dhawan was not yet 40 when he hired Kaul. 

The age disparity and his deep operational expertise meant that Kaul automatically gained a measure of seniority when he joined the team and began to help the firm build its pharmaceutical exposure. But he soon realized that he would have to adapt to a very different role as an investor than he had held in the industry. At Ranbaxy Kaul had managed a team of more than 3,000 and could implement changes with a phone call; at ChrysCapital the only power he had to effect even the most urgent reforms in a portfolio company would come from his relationship with the promoters.

Relationships matter

Recognizing this limitation led Kaul to one of the key realizations about private equity: no matter how much authority an investor demands based on his industry knowledge or financial stake in a company, ultimately the only voice that matters is that of the entrepreneur. The best protection that an investor can have is the promoter's recognition of his ability to help the company.

"The entrepreneur is the most critical element of this journey – if he wants to shock you he will do so, no matter how solid an agreement you may have in place or how tightly knitted are your affirmative rights," Kaul says. "The only way you can create value after your investment is when the entrepreneur recognizes your ability to coordinate that value-add and seeks you out as a sounding board."

Kaul's other insight was that for entrepreneurs, building a new company is often a lonely experience in which the founder feels as if nobody understands the pressure he is under or the vision he is trying to achieve. Consequently, while they may initially bristle at being told what to do by outsiders, the best promoters will quickly realize when an investor shares their knowledge of the industry and has valuable insights that can help the company succeed.

This kind of relationship has become easier to establish in recent years as the reputation of private equity in India improves and promoters actively seek out GPs for both investment capital and advice on operational improvements. In turn, ChrysCapital has sought to build its own sector knowledge by deepening its engagement with portfolio companies, and sometimes going even further.

"I encourage my colleagues to develop that kind of bond, and not only with the promoter," says Kaul. "You need to establish relationships at the top and at lower levels, because portfolio companies are often very dynamic organizations, and people who may not have seemed important earlier will remember you later. You need to take the pulse of the organization by interacting at different levels in the portfolio company and also with competitors so you can benchmark their performance."

Kaul's deep storehouse of industry knowledge has helped ChrysCapital go from success to success in a string of pharmaceutical exits, netting the firm returns in dollar terms ranging from 2.9x for Torrent Pharma to 16.9x for Intas Pharmaceuticals. He tries to tailor his advice to the circumstances of each company, encouraging some promoters to make the leap into international markets while counseling others to stay in India and build their domestic presence for the time being. 

One of these deals – a 2011 commitment of $25 million to Mankind that the firm exited for more than $200 million in 2015 – was such a positive experience that ChrysCapital returned to the company earlier this year, leading a consortium that included Singapore's GIC Private and Adams Street Partners to pick up a 10% stake for $325 million. It is the largest-ever PE investment in India's pharma sector. The deal stands as a firm reminder to Kaul that promoters value an investor's operational guidance just as much, if not more than, its financial resources.

"We had won after bidding almost 10% lower than the other bidders in the deal, and even afterward our competitors tried to up their bid by another 5%, just to tempt the promoter to reconsider his decision," says Kaul. "But the promoter stuck to his guns and said no, my comfort level with ChrysCapital and Sanjiv Kaul is very high."

An institutional approach

Having proven its operational capabilities in pharmaceuticals and healthcare – as well in consumer, business services, and financial services – ChrysCapital is currently building an institutional framework for these efforts to create a unified, firm-wide approach to value-add. Called Enhancin, the project will result in an internal team that brings together all of the GP's operational partners so they can combine their talents more efficiently for the good of portfolio companies. 

From his unique position as a veteran of the private equity and pharmaceutical industries in India, Kaul sees considerable potential for both sides to further develop healthy relationships. The key is for entrepreneurs to be willing to listen to the advice of their investors, and for GPs to have the discipline to stick with their investees even when circumstances seem to turn against them.

"What's unique about ChrysCapital is that when portfolio companies are in trouble, or when there is a crisis, that's when we redouble our efforts and interact with our companies much more," Kaul says. "And that is what these teams remember – when you interact with them to help in the hardest times, you're able to create a much more lasting impression."   

Pictured: Sanjiv Kaul of ChrysCapital Partners

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• Topics
• South Asia
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• AVCJ Awards