Q&A: ChrysCapital Partners' Sanjay Kukreja

Q: How has ChrysCapital – and its portfolio – been impacted by the COVID-19 outbreak?

A: Any recession is painful, but in general we’ve come out reasonably well. We look at it through three lenses. First, we were fortunate to raise Fund VIII last year, so it was just starting out. Going into COVID-19, we were 5% deployed and now we are 20% deployed. It’s been a good environment to have dry powder – we have benefited from lower pricing in certain situations. Second, from a portfolio construction point of view, we were heavily overweight in pharma. The sector has been robust. We also have significant exposure to IT, which might be flat or slightly down in terms of revenue, but margins have expanded because the currency has depreciated. Third, we were well-positioned in terms of the DPI [distributions to paid-in] lifecycle. Fund VI was protected because we had several exits in the six months prior to COVID-19. 

Q: What about new investments?

A: Most sectors we look at have been reasonably shielded. Financials and consumer are in a tight spot, but of that 20% deployed, 17-18% is in pharma.

Q: Would you do a consumer deal right now?

A: We have never hesitated from doing contrarian plays, but you need to be compensated for that in the pricing and understand where the market is. The technology side of consumer is seeing a boom right now. Other segments, such as QSR [quick service restaurants] are going through structural change. I think we will end up doing a consumer deal this year – it is a core sector for us, the return on capital is high, and consumption growth in the long term will be strong. But we are tiptoeing around those areas where disruption is greatest.

Q: To what extent is there a clear COVID-19 angle to your healthcare investments?

A: Some of these were proprietary in nature and resulted from long discussions. I don’t think COVID-19 has accelerated the sector. While margins have improved – because cost controls are much better – revenue has slowed; it was 10-12% prior to COVID-19 and now it’s maybe half that. Are you being compensated in terms of better valuations? Probably not.

Q: How has ChrysCapital’s healthcare strategy evolved over time?

A: We are much more open to doing buyout transactions in pharma. Five years ago, we would have hesitated. Part of it is we’ve had success in other sectors, like IT and business services. When we sold LiquidHub to Capgemini, it was a $500 million deal – our largest-ever strategic takeout from a control deal perspective. Historically, India has been a minority growth market, but buyouts are on the rise. As for segments, we always been strong in domestic formulations and we’ve done multiple investments there in the past. Now are thesis is becoming broader and deeper. We are getting more comfortable with medical devices and the healthcare delivery side.

Q: How much of that is healthcare technology?

A: It’s not a very large area, perhaps more of an emerging theme. We’ve always looked at it in services, for example, companies that do revenue cycle management. As for healthcare tech in new product development, we see it a little bit in devices.

Q: How prevalent is technology in your investments generally?

A: Ultimately, you are looking to compound money over 7-10 years, so you want to have the right technology. We are looking at the broader space; a company doesn’t have to be a big enabler or beneficiary of tech, although those things help on the margins. There haven’t been many examples of companies generating profit in the tech space. They had revenue growth, but there wasn’t much in terms of gross margins. Cash burn was supported by fresh rounds of capital every 6-12 months. That is now beginning to change. Entrepreneurs are moving towards profitable models and leaders have emerged in some segments, so those companies are making better money than they were a couple of years ago. For us, that is a game-changer – the opportunity to back profitable companies.

Q: What more are you doing in terms of value creation focused on technology?

A: During COVID-19, we added a resource in that area. We focus on a lot of areas within tech where we can help our companies. Take analytics. Within financial services, customers are being looked at very differently through algorithms. We do a lot of work in terms of identifying partners and bringing in knowledge.

Q: How much capital do you expect to deploy this year?

A: We like to deploy $200-300 million a year and we are on track for that in 2020. Usually, we end up doing four deals a year. We’ve done two so far this year and we are about to close a third. We target the same number of deals as before; we are just doing larger transactions. We invested $135 million in Intas Pharmaceuticals this year and $300 million in Mankind Pharma in 2018. However, the sweet spot remains $50-100 million. 

Q: Intas and Mankind are both examples of ChrysCapital re-investing in a business it has backed – and exited – before. Will there be more of this?

A: We have strong relationships with the companies we invest in. Once you go on a journey with companies you get to know them intimately, and it is better to work with someone like that. You go in with your eyes open – you know their strengths and weaknesses. But it’s rare to find companies that compound well for 20 years. Within seven years there is usually some general change or business segment change. When you do come across companies in leadership positions, you want to back them and there are many ways you can stay engaged, even after a business goes public. We first invested in Intas 15 years ago, when it was doing less than INR500 million ($6.7 million) in net profit. Our valuation was INR5 billion, or 10x earnings. Today they do three times that amount in net profit. Some of the new steps Intas is taking suggest there are still legs of growth.

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• Topics
• South Asia
• GPs
• Buyouts
• Expansion
• Healthcare
• India
• ChrysCapital Management