True North plays to its strengths, to stay away from infra and realty

The buzz has been that Vishal Nevatia, managing partner of True North, offered to relinquish his carry when a particular fund didn’t perform. But ask him about it and the former accountant with US-based accounting firm Arthur Andersen will say it happened a little differently. Carry, or carried interest, is a share of profit that the general partners (GPs) of private equity (PE) firms receive as compensation.

“During Fund IV, for which we raised $700 million in 2010, we didn’t anticipate the economic slowdown that followed,” he says. “We waited a couple of years because interest rates were high and opportunities had hit a wall, and then decided to reduce the fund size by a $100 million. We returned our fees on that.” Legally he didn’t have to because not investing during a bad season is also prudent management. 

A decade later, the PE ecosystem is a different world. According to data from EY, at $1.7 trillion of PE and venture capital (VC) investments, 2018 was the best year since 2007 for the industry globally, with most of that growth driven by mega deals backed by mega funds in US and Europe. Dry powder levels, or the money available for further investments, with GPs globally hit record levels of $2.1 trillion, the EY report said. 

“We are in the golden age of PE globally because of GPs’ continued ability to generate returns superior to public market returns and most limited partners (LPs) are increasing their capital allocations to the PE asset class,” says Vivek Soni partner and national leader, private equity services at EY. 

No surprise then that Mumbai-based True North, which had a respectable run in the past few years, generated around $700 million in returns on its top four bets alone. Today, the firm is looking to increase the size of its bets and focus sectors. True North specialises in consumer, financial, health care, and now technology sectors, and is a few months away from closing a $1.4-billion round for Fund VI. That includes a $700-million core fund and an additional $700 million to be deployed through a co-investment vehicle for key focus areas. Technology, the latest focus, has also seen Nevatia add a senior advisor and two managers from other PE companies, with a recent $50-million investment in New York-based digital content design company the Born Group. 

Nevatia says the firm’s mission is to build ‘admired companies’. “Take care of the customer and you will automatically satisfy other stakeholders. We almost died a few times and had many hard quarters,” Nevatia says. One instance was when they had around Rs 450 crore invested in Mahindra Hinoday and Innovative B2B Logistics Solutions. Almost simultaneously, Mahindra cut back on output by about 70 per cent due to market conditions and Innovative B2B Logistics saw its freight haulage costs spike by 50 per cent. This was circa 2009. 

But prudent cultural traits helped True North stay on course. In the early years, Nevatia would trade future carry for cash to keep the shop running. The firm took other conservative approaches as well. “It’s free entry and free exit, which means we want the best to stay and perform,” Nevatia says. 

True North’s ownership structure resides in a private trust, he goes on to say, which has been designed to ensure the perpetuity of the firm. In addition, True North’s carry has been designed to be split equally between 16 business managers and nine investment partners — unusual amongst PEs where investment pros get paid more. 

While writing checks for just a few crores to a few hundred crores has, in part, been due to a rising tide that lifted all ships, the crossing of the $1-billion-mark for assets under management AUM by Indian GPs, marks a coming of age. There are, according to EY, five notable Indian firms in the sector to have raised substantial funds over their life cycles: Everstone Capital ($4.5 billion), ChrysCapital ($3.9 billion), True North ($2.8 billion), MAAM ($2.4 billion), and Kedaara Capital ($1.3 billion).

“Beyond quality and size of teams, it is also about raising and returning capital across multiple funds to LPs, and being able to chase larger and complex transactions, which include carveouts, buyouts, and having a strong bench of operations experts once deals are executed,” Soni adds.

On its part, True North maintains it always did controlled buy outs. Nevatia acknowledges recent carveouts, or hive offs of divisions from companies. Examples include Integrace from Glenmark and another division from Sesa Oil last year. 

Nevatia says True North won’t invest in everything. Infrastructure and real estate where ticket sizes can run into thousands of crores are two sectors it would not look at. Also, areas to avoid are sectors that are heavily regulated, except for finance. They also won’t touch a company tainted by accounting fraud or scandal. “Bad operations can be fixed but we find that a bad culture takes too much time and is very deep rooted,” Nevatia says.