Deal focus: Growth capital secondaries

Soma Ghosal Dhar is no stranger to secondary transactions. As a co-founder of Asia Growth Capital Advisors (AGCA), she was part of the team that spun out from Credit Suisse Private Equity Asia in 2010 and reunited with its legacy portfolio three years later through a fund restructuring. The firm managed its positions in India and Southeast Asia, while simultaneously looking for direct secondary deals across the region. In Basil Partners, Ghosal Dhar thought she had found something different.

“Most secondaries are end-of-term distress situations. This transaction was refreshing because it was growth capital-oriented,” she says. “You find these situations sometimes in Asia: a bunch of smart people, with deep operating experience in some knowledge-based sector, investing their own or ‘friends and family’ capital, but they hit a ceiling in terms of taking their investees to the next level, since the source of capital is not sustainable or institutional.”  

Ghosal Dhar conceptualized a transaction in which NewQuest Capital Partners and Committed Advisors contributed $175 million to a new fund that took out positions in six companies held by Basil and a string of co-investors. The fund now has a majority stake in each one, with $30 million set aside for follow-on capital. The Basil team remains in place to manage this vehicle and Ghosal Dhar – who was a tech investor earlier in her career – has joined as partner and CEO.

Small beginnings

Rajeev Srivastava established Basil in 2008 as a family office. It has seeded a number of IT services businesses and secured six exits. Whenever a company needed more capital, Srivastava went to high net worth individuals (HNWIs) and other family offices. There was no overarching structure, and shareholder agreements were loose.

Ghosal Dhar met Srivastava when he was looking to raise additional capital for Stone Apple Solutions, a Singapore-headquartered IT consulting firm in the midst of a rapid growth spurt. Stone Apple was ultimately sold to Hitachi, and Ghosal Dhar was impressed by what she saw.

“It was clear that Basil’s founders had been successful in translating their operating experience into an investment strategy and they knew how to seed, run and exit companies at early stages. However, a lack of long-term institutional capital led to complex and unwieldy shareholding structures in the investee companies, imposing restrictions on the ability to support portfolio growth and often led to premature sub-optimal exit situations,” she recalls.

Ghosal Dhar suggested a secondary and six companies, with combined revenues of $300 million, were selected to be part of the deal. Relevance Lab, Gavs, Accion Labs, and Apar Technologies are some of the names among the collection of automation specialists, cloud infrastructure platforms, risk management solutions providers, digital transformation players, and IT consulting firms.

Most serve global customer bases, although their delivery centers are usually in India. The common theme is business transformation and taking operations to the cloud.

The structuring process was complicated by the diffuse shareholder base. Term sheets were sent out to 30-40 investors about a year before the transaction closed. Some held stakes in multiple portfolio companies, others in only one. All were given the option of rolling over their interests into the fund, but none ended up doing so. There was a general reluctance to tie up capital for another 5-10 years – and start paying fees on it – when liquidity was available.

“Most secondary directs are from one vehicle to another, so you avoid triggering preemption rights through a change in control,” says Barthélémy de Beaupuy, a founder and managing partner at Committed Advisors. “In this case, there was added complexity because we were moving Basil from being a minority to a majority investor in the deals. There was some co-investment they were not directly managing, and we had to bundle all that into a single vehicle.

By clearing out the non-operating shareholders and taking full control, Basil is now able to give the companies proper direction in terms of corporate governance, business development, and taking advantage of synergies within the portfolio. It also has institutional backing, which means follow-on rounds of $20-30 million from a handful of investors rather than piecing together HNWI contributions for a $5 million check.

“Given the disparate shareholding, no one was in control and no one had enough money. Every time they needed more capital they would have to check with each of the shareholders,” says Amit Gupta, a founding partner at NewQuest. “By consolidating the shareholdings and providing follow-on capital we have made sure there is alignment between the management teams of these companies and the shareholders.”

Unusual aspects

For NewQuest, best known as an Asia-focused direct secondaries investor, this transaction is part of a solutions strategy devised over the last couple of years. It involves the firm entering into partnerships with existing GPs and acting as an anchor LP to give a portfolio additional runway. Gupta observes that Basil stands out not just for the structural challenges of the deal, but also because it is an example of a highly specialized fund in a primarily generalist crowd.

In the view of Ghosal Dhar, it is no coincidence that IT services has attracted investor interest. This niche segment is becoming increasingly mainstream as companies of all kinds pursue digitization strategies as they seek to reach consumers through new channels.

“Technology is driving change and the Basil team has been working in these areas for some time,” she adds. “Traditional IT services companies struggle to cater to this market because they have so much legacy business. Smaller companies with strong intellectual property are nimbler and well positioned to nibble away at these parts of the business from larger competitors.” 

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• Topics
• South Asia
• Southeast Asia
• Secondaries
• Technology
• India
• NewQuest Capital Partners
• Basil Partners
• Committed Advisors