Fund focus: ChrysCapital accumulates $1.4b India war chest

ChrysCapital Partners took four months to reach a final close of USD 867m on its eighth fund in early 2019. With Fund VII not yet fully exhausted, the India-based GP warehoused the new vehicle for nine months, delaying the moment when LPs began paying fees and the IRR clock started ticking.

The process was similar for Fund IX. It launched in late 2021 and was quickly oversubscribed, enabling ChrysCapital to effectively finalise the LP base within six months. However, the period earmarked for warehousing was in fact spent helping a couple of investors – one of which didn’t want to invest through Mauritius, where the fund is domiciled – complete their paperwork.

A final close at the institutional hard cap of USD 1.25bn came at the end of 2022. Including a GP commitment that is unusually large by historical standards, the final total was USD 1.4bn. It is the largest India-focused private equity fund ever raised.

ChrysCapital has topped USD 1bn before. Its fifth fund closed on USD 1.25bn in 2007 but was pared back to USD 960m as conditions deteriorated. Kunal Shroff (pictured), the firm’s managing partner, notes that much has changed since then. Average annual PE investment in India was USD 6.3bn in 2003-2007. For the three subsequent five-year periods it was USD 8.4bn, USD 14bn, and USD 43.7bn.

This growth is reflected in the firm's investment pace. Fund VIII was almost fully deployed in three years and two deals were completed within six months of activating Fund IX. ChrysCapital put USD 300m into those transactions; including co-investment, the total amount of equity put to work is nearly USD 850m.

"Based on our team strength, sector specialisations, networks, and our track record, we could have raised more, but we said we would just come back to market faster, in three years rather than five years," Shroff said.

"Markets will always go through tricky periods where fewer deals happen, but every time we ask, ‘How much can we profitably deploy in India on an annualised basis?’ the figure continues to go up.”

Offshore vs onshore

The Fund IX LP base isn’t much different from that of its predecessor. COVID-19 was a key factor. The ChrysCapital team was only able to resume in-person marketing in 2022 after a two-year hiatus. At the same time, existing LPs, communicating with managers via Zoom and preferring to re-up with existing relationships than enter new ones, were eager to consume the additional capacity.

During the pandemic, the firm increased the frequency of LP engagement, reporting portfolio valuations four times a year rather than twice and hosting regular calls. Shroff credits these efforts with smoothing the path to Fund IX.

By retaining the Mauritius structure, ChrysCapital restricted itself to overseas investors at a time when some peers are looking to raise more capital domestically. Onshore fund structures appeal because they offer greater investment flexibility, allow LP bases to be diversified, and reassure global LPs that like to back managers with local supporters. But ChrysCapital is being patient.

“There wasn’t much clarity on the full fund lifecycle – what happens in terms of tax treatment when the fund is liquidated and generates carry – when we evaluated it for Fund VIII. By the time Fund IX came around, the clarity still hadn’t improved, and the same consultants who advised us to do an AIF [onshore alternative investment fund] for Fund VIII told us not to do it for Fund IX,” said Shroff.

The jury is also out on Gujarat International Finance Tec-City (GIFT City), which offers tax benefits to managers that establish local substance. ChrysCapital has the appropriate infrastructure established in Mauritius and it will assess the merits of GIFT City structures before launching Fund X.

The firm has undergone a strategic evolution even as its structures remain the same. Moving from Fund V to Fund VI, sector coverage consolidated around business services, financial services, pharma, and consumer. Taking a more granular approach unlocked opportunities in adjacent areas, resulting in healthcare services and non-lending financials becoming fully fledged sub-sectors.

Tentatively in Fund VIII and more resolutely in Fund IX, ChrysCapital is also revisiting manufacturing – encouraged by favourable government policies and incentives – and it has added new economy. There have been investments in the likes of fantasy sports platform operator Dream Sports, mother-and-baby retailer FirstCry, and e-commerce logistics specialist Xpressbees, none of them early stage.

“We are playing it in a way that works for our DNA. We need spaces that can be defended against the global big boys, where market leadership has emerged, and where we can see a path to profitability in a reasonable timeframe,” said Shroff. “It’s not going to be cheap – we will have to pay up for growth.”

The firm prioritises situations where it can have regular engagement with management teams. Oftentimes, these are start-ups that are looking to rebalance their cap tables from venture capital to private equity in preparation for IPO. ChrysCapital’s role is to help facilitate the transition to mature business practices, which means putting in place proper governance structures.

These efforts are coordinated by a 35-strong team, comprising 20 investment professionals, five operations professionals, and four finance and structuring specialists, plus administrative staff. The five partners are responsible for different aspects of the business – such as investments, investor relations, value creation, and internal operations – and the investment team is divided up by sector.

“We have grown our sector coverage incrementally to ensure we develop the right expertise. It’s not just about having themes that you aggregate around a sector and it doesn’t make sense if a team is looking at 10 different sectors. We have achieved the necessary focus by creating dedicated teams and then we have added operational experience over time,” said Sanjay Kukreja, the firm’s CIO.

Going large

Building sector coverage in this fashion has also allowed ChrysCapital to approach buyouts with more conviction. About one-quarter of the capital put to work over the past decade has gone into control situations, compared to zero in the decade before that. The firm made early headway in IT services, leveraging the India-US channel, but opportunities are no longer restricted to this area.

“There used to be a stigma to selling your business, but so many have done it now,” said Kukreja. “A generational shift is happening as entrepreneurs who started businesses in the 1990s find they have no successors. In some cases, several families are involved, so it’s easiest to sell to private equity and realise the proceeds. We also see more entrepreneurs migrating out to enjoy life elsewhere.”

The first two deals in Fund IX are both buyouts: ChrysCapital teamed up with GIC and Bandhan Financial Holdings to acquire IDFC’s asset management business for INR 45bn (USD 593m) and it followed up with the purchase of software engineering and IT provider Xoriant for USD 350m.

In each case, LP co-investors were mobilised. Significant co-investment opportunities were relatively few in Funds VII and VIII – the firm tapped LPs for the USD 350m acquisition of a minority stake in Mankind Pharma in 2018 and in the USD 400m buyout of ResultsCX in 2021 – but they are expected to become more frequent in Fund IX.

“LPs want more co-investment, especially in sectors where we have proven ourselves. We appreciate co-investors as they allow us to punch above our weight in our sectors of specialisation. To the extent they can come in early with us, helping us to bid for an asset we wouldn’t be able to speak for on our own, it can be a nice win-win,” said Shroff.

If this implies a fund cycle characterised by ChrysCapital writing bigger equity cheques to own bigger assets, Shroff is keen to play down the hype, stressing that India remains a predominantly minority investment market. For all the IT services buyouts appearing on the radar, there are plenty of founders in the pharma sector who are either unwilling to sell or asking for too rich a valuation.

Shroff also places the recent favourable buzz surrounding India into a realistic context. “It’s coming off a bit now, and you can’t get too carried away in either direction,” he said. “But India private equity has huge long-term potential when you look at generational transfer, the maturity of the market, and value-add becoming more important. You can’t just be passive and get the returns anymore.”

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