Fund focus: DSG buoyed by brand awareness

Deepak Shahdadpuri, a managing director and founder of DSG Consumer Partners, maintains that it takes a decade to develop a robust consumer brand. With DSG’s debut fund now in its 10th year, a host of brands across India and Southeast Asia that the firm has supported since the early stages are coming into bloom. Of the 21 portfolio companies, nine have been exited and seven more are on the way.

“They [the seven] are all profitable except for one and they are all market leaders in their categories. I will sell them in the next six months,” said Shahdadpuri, who recently closed Fund IV on USD 114m.

Of the nine exits, three were sales to strategic investors, two went to financial investors, two more were picked by brand agglomeration platforms, and one went public (although DSG has yet to sell down). The nine have generated realisations of USD 72m, which compares favourably against not only the USD 24m Fund I corpus but also the USD 130m in capital called and USD 108m invested across all the firm’s funds.

Budget hotel platform Oyo Rooms, which DSG backed as a one-year-old start-up in 2014, became a key performance driver thanks to the emergence of SoftBank Vision Fund and its scale-first philosophy. DSG sold its positions across two funding rounds in 2016-2017, recognising that the offer was too good to turn down and that its value contribution to the company under SoftBank strategy would be diminished.

What SoftBank was doing then, mid-cap and large-cap private equity firms are doing now. There are only two other consumer specialists of size operating in India and Southeast Asia – L Catterton and A91 Partners – but DSG has found that an increasing number of generalist GPs are keen on the sector.

“What we’ve seen with the best companies in our portfolio, before the strategics even make an offer, the private equity shops – firms that invest USD 50m-USD 200m – are saying, ‘You’ve scaled it to a meaningful size, before you sell it to Unilever, Nestle, or Kellogg, we will take you out and run it for the next three years and then we will sell it to the strategic,’” Shahdadpuri explained.

He wouldn’t be drawn on the likely buyer of Veeba, an Indian condiments and sauce brand currently subject to an exit process involving DSG’s Fund I position. But it is cited as an example of what can happen when an investor gets in early enough with a brand. Veeba is 10 years old, profitable, and generates more than USD 100m in annual revenue. For that kind of profile, DSG expects 15x-20x return.

Ringing endorsements

Crucially, LPs appear increasingly convinced that non-technology brands can generate the distributions they’ve come to expect from classic asset-light technology businesses and in a similar 7-10-year timeframe. It is one of three reasons Shahdadpuri gives for the recent fundraising momentum, alongside India’s still-flourishing macro story and some LPs wanting to shift Asian allocations away from China.

Fund IV had accumulated commitments of USD 104m within a year of launch, including a first close of USD 63m in April 2022. The fundraising process was extended by about six months, to 18 months in total, but only to accommodate one LP – an existing investor from Funds II and III – that requested more time, Shahdadpuri explained. Another LP unexpectedly came into the final close as well.

Even though DSG was targeting USD 120m, nearly twice what it raised in the previous vintage, existing LPs accounted for 72% of the fund corpus. The anchor investor from the previous fund doubled its contribution, while L’Oreal and Wipro Consumer Care & Lighting came in as new investors through their corporate venture funds. DSG also has a longstanding relationship with Verlinvest as an LP in its funds.

On a macro level, DSG is not changing its approach. It will still make early-stage investments based on extensive research into what drives consumer behaviour and wallet share in markets like India, Indonesia, Vietnam, and the Philippines, looking to leverage the increase in discretionary spending that follows rises in per capita GDP. That said, the themes the firm invests in have evolved.

“Consumers are very focused on health and wellness, while sustainability has pushed into the top 10 considerations when making decisions,” Shahdadpuri said. “There is also an aspirational luxury angle in every market. It's not about tier-one fashion and luxury brands. At every price point, people want something that pampers them and is slightly more expensive or better than what they used to spend money on.”

There is one structural tweak. DSG has ringfenced USD 80m for its core early-stage strategy, which means there is USD 34m left for growth-stage deals. The firm will back brands that have not previously received funding from it and it will enter 3-5 years later than would normally be the case.

This is a response to changing market dynamics. DSG typically writes cheques of USD 250,000 to USD 2m on day one and re-ups in subsequent rounds to the point where an individual holding makes up 10% of the fund. Shahdadpuri believes there is a vacuum in the market segment characterised by Series A rounds of USD 10m because the incumbents have vacated it, usually due to fund size increases.

“We are testing to validate whether we can make as exciting returns going in slightly later,” he added.

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• Topics
• South Asia
• Southeast Asia
• Fundraising
• Growth
• Consumer
• India
• DSG Partners Asia
• Fundraising