Fund focus: Sizing up selectively

Mankind Pharma is only the second deal for which ChrysCapital has brought in LPs as co-investors. Last year, the Indian mid-market private equity firm was a late addition to a competitive process – at the invitation of Mankind’s founding family – and ended up winning a $325 million deal from under the noses of two global GPs. Additional capital commitments came from GIC Private, Adams Street Partners, HarbourVest Partners, and Pantheon.

“While we’re not going to fill the portfolio with big deals, we don’t want to ignore opportunities if we see them in sectors that we know well,” says Kunal Shroff, a managing partner at ChrysCapital. “This has coincided with greater interest in co-investment among LPs. Our approach has always been that we can’t promise it, we to be disciplined. But we keep a dialogue open with LPs that want to put money to work.”

Mankind didn’t just come from a sector with which the firm was familiar. ChrysCapital first backed the company in 2007, helping it become India’s fifth-largest pharma player, before exiting eight years later with a 7.6x return. Familiarity gave the GP the confidence to write a sizeable check – excluding the co-investment – and this newfound penchant for the larger deal is one reason why Fund VII, which closed at $600 million in early 2017, is already more than 80% deployed.

As a result, Fund VIII was fast-tracked, with a final close of $867 million – $850 million in institutional money plus the GP commitment – announced last week. The vehicle was significantly oversubscribed, and the fundraising process took just four months. 

“We’re backing them because they’ve delivered 70 exits from about 80 investments and the track record is north of 2x. They are good at getting out of situations, they are opportunistic, and they back some of the same companies over and over, but it seems to work,” says one longstanding LP. “In addition, concerns about the new generation of partners post-Ashish Dhawan [ChrysCapital’s founder] have gone away.”

Gradual evolution

If Dhawan’s tenure, which lasted from 1999-2011, was ChrysCapital 1.0, Shroff describes the current iteration as 2.0 or 2.5. Institutionalization is part of the evolution. Steps have been taken to create more of a meritocracy, with an expanded investment committee and a clear development path for younger members of the team. The goal is to make ChrysCapital about more than just one or two people, and until Shroff’s election as managing partner, the firm was run by a six-strong collective.

The shift in mindset that has put larger deals on the agenda began about three years ago. Before then, the firm was only interested in writing checks of around $50 million, believing that smaller transactions delivered better multiples. “As more data came in and we analyzed the details, we found the biggest correlation was in sectors. If you were in IT services, whether it was with a $50 million deal or a $200 million deal, the returns were strong on a median basis,” says Shroff. 

ChrysCapital’s core sectors remain financial services, healthcare, consumer, and IT services. Most transactions are likely to fall in the $25-200 million range. Co-investment puts opportunities of up to $500 million within reach as well.

The Mankind investment, though large in dollar terms, was for a 10% stake. It serves as a reminder that India is still predominantly a minority growth market and increasing deal sizes should not be conflated with a swift move towards control. Buyouts are becoming more prevalent, but it is a slow process, and India is starting from a low base. While greater emphasis on operational improvement is part of ChrysCapital’s development, the key driver is change in the entrepreneur community.

“Though the stake is still 15-20%, entrepreneurs recognize they don’t have all the answers. They are looking to private equity more than before,” says Shroff. “It means your engagement level and your operational value-add capacity are higher. It is also where sector specialization works in your favor.”

A broader bounce

The fundraising process benefited from the continued maturation of private equity in India. Investment hit a record high of $29.9 billion in 2018, with $9.1 billion of that going into buyout deals, more than three times the 2017 figure. Meanwhile, exit proceeds crossed the $10 billion threshold in 2015 and haven’t looked back, even though the 2018 total of $28.4 billion is skewed by the bumper trade sale of Flipkart. 

India’s economy stumbled somewhat in 2018 and the upcoming elections could foster uncertainty. But these issues did not prove to be sticking points in what Shroff describes as a surprisingly smooth fundraising process. 

“The previous fundraise was harder, and I guess what’s changed is that India has become a more popular destination. At the same time, a lot of LPs want exposure to India, but there are few quality GPs to back,” the LP adds. Asked about the challenges facing ChrysCapital, the investor highlights the importance of staying strategically relevant in a changing market and deploying a larger fund in an efficient manner.

ChrysCapital’s eighth vehicle is not the largest it has raised. Fund V closed at $1.25 billion in 2007 but was cut back to $960 million because larger opportunities dried up and the firm wanted to retreat to the lower middle market. Now, though, it is reentering that territory. Based on the $250 million deployed in 2018, not including co-investment, the GP might say it could deploy $1.25 billion over five years. 

The team imposed a hard cap of $850 million because it decided to focus on a four-year deployment period – essentially leaving space and time to address unforeseen problems. No India country fund has crossed the $1 billion threshold since ChrysCapital, but it might only be a matter of time. 

“I wouldn’t say there is a glass ceiling and an Indian country fund shouldn’t raise $1 billion,” Shroff says. “I wouldn’t be surprised if someone steps up in the next year or so and says, I’ve deployed $300 million a year, multiply that by five and I can do $1.5 billion. Maybe the deal sizes and stakes sizes go up over time, or maybe the control opportunity opens up more.”   

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• Topics
• South Asia
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• ChrysCapital Management
• Pharmaceuticals
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