Q&A: Everstone Capital's Sameer Sain

Q: What is the problem with private equity exits in India?

A: If you are a minority investor your biggest exit mechanism tends to be an IPO so there is a high correlation between buoyancy of capital markets and exits. This also applies to firms that do PIPE deals, especially in the mid-market, which tend to be quite illiquid. During the peak years a lot of funds were doing these illiquid PIPEs and non-control mid-market deals, and this left them with few options when the capital markets stopped working.

Q: What about the valuations these investments were made at during the peak years?

A: A lot of investments were made at high valuations, and there was a bit of a double whammy: not only were deals expensive, but the underwriting on those investments was aggressive in terms of growth expectations to justify the price. Growth has since slowed. However, when you look at averages in India, it's meaningless because distributions of returns are wide and so the tails are very fat. On average there are few exits, deals are expensive, it's hard for investors to get their money. But, if you look at the top 20% of PE funds, the quality of people, pedigree, and overall risk returns divert quite dramatically from the average. Some of these funds are managed by seasoned hands who have credibility with investors, which explains why capital is now concentrated with few funds in India

Q: So there was a boom period in which a lot of people raised money that shouldn't have raised money?

A: Precisely. The bulk of the money that was raised was so dispersed that the average will look mediocre. But take ChrysCapital Partners as an example: They have returned capital, they have completed exits and they had no issues raising a $510 million fund, even though Ashish Dhawan left. There are about 5-6 other players that fall into this space.

Q: What is the exit situation like for your first fund?

A: We started investing in January 2007 so the investment period ended last year. We have returned approximately 15% of the capital to investors and there are some exits lined up for the next 6-8 months, so I would say we are on schedule. We are classically private - we don't do PIPE deals where you can be more opportunistic when the markets are hot - and normally target a 5-6 year holding period. We haven't relied on the capital markets: there have been two exits, one to a financial sponsor and the other to a strategic investor; both were done at an IRR north of 35% and close to a 3x money multiple.

Q: When raising Fund II, what did you tell LPs about exits?

A: I think LPs understand the dilemma they face in India. It's a young industry with few mature players and you have to take a long-term, growth-oriented approach. On the other hand, they are frustrated to some extent because they haven't seen as much money back as originally expected. During our fundraising there were questions about exits and we must have answered them satisfactorily because we were oversubscribed. But, it's a big issue with LPs. The next two years will be critical for the industry: We must return money to LPs so they retain their confidence in the Indian private equity story.

Q: Is now a good time to invest?

A: The broad answer is, yes. We were very quiet in the first 18 months after closing Fund II as we felt there was still a lot of capital out there and valuations had not adjusted. However, in the last 6 months we've gotten extremely active. Also, you have to be extremely selective when it comes to themes and sectors. Average GDP growth might be 6%, but you have sectors growing at a double-digit pace while others are shrinking. So yes, it's a good time to invest, but there are also many landmines to watch out for.

Q: Which sectors do you see as the most attractive?

A: Anything to do with domestic consumption is still very strong. As a country, India is massively supply constrained. At the right price point we have almost exponential demand for any consumption-based business, whether it's healthcare, education, fast-moving consumer goods, apparel, beauty or wellness. It is a good time to invest for two other reasons. First, numerous irrational players have either exited the market or run out of capital, so fewer firms have capital in India and those that do are generally sensible and mature. Second, good quality businesses are showing up for the first time in a long time at reasonable valuations.

Q: To what extent does Everstone have a remit to invest outside of India?

A: A percentage of the fund can be invested outside of India but we really only look for things that have a solid India angle - by introducing a strong India angle we can tweak growth rates and turn what might be a boring mature business into an exciting growth business. For example, we have Faces Cosmetics in our Fund I portfolio. It was pretty much a bankrupt company in Canada when we bought it. We launched in India and now it is the country's fastest-growing colour-cosmetics brand with more than 1,000 distribution points.

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• Topics
• South Asia
• Exits
• Everstone Capital
• India
• Exit