 "We like to invest in firms that are proxies for India's growth: Manish Kejriwal")
Kedaara Capital Advisors raised $540 million as its maiden fund in November 2013. It was then the largest first-time-fund raised by any private equity (PE) firm in India. The PE firm - co-founded by former Temasek veteran Manish Kejriwal and seasoned peers from General Atlantic, Sunish Sharma and Nishant Sharma, has already deployed nearly half this capital. Kejriwal, managing partner, spoke to Abhineet Kumar on the strategy of his firm and the plans ahead. Edited excerpts:
The first half of this year has been one of the most active periods for PE in India. What does it indicate?
There is a lot of excitement around India and its potential. The country is currently the shining star among BRICS (Brazil, Russia, India, China and South Africa) and among most other emerging markets. The fall in oil prices along with other commodity prices, the lower dependence on exports, the falling current account and fiscal deficits as well as the strong mandate for the government have enhanced the attractiveness of the Indian market. Moreover, we as an industry have matured. Many PE players have learnt from experience and are now much more focused on areas like governance, exit and entry at the right valuations. All this has led to record investments in private equity.
We raised the first fund only about a year and a half ago and have deployed close to half the amount in five companies which are all market leaders in their focus markets. Our focus is to deploy the rest of the fund very selectively in another five or six high-performing companies, even as we support and grow the companies in the existing portfolio. This will require dedicated effort from the entire investing and operating team for the next couple of years, after which we will shift our focus on fund II.
Your current portfolio includes two packaging companies. Any rationale for preference for this space?
We are sector-agnostic but our two broad themes for investment in the packaging companies have been around rising consumer demand and backing quality entrepreneurs. We are looking at companies that will benefit as the consumer story plays out in India. The most obvious ones are the large FMCG (fast-moving consumer goods) companies such as Unilever, Dabur and ITC; but they are trading at crazy valuations. So, we focused on companies which are either benefiting directly from the increase in consumer spend or which are very good proxies to this consumer demand. Both the companies in the packaging space that we invested (Parksons Packaging and Manjushree Technopack) are proxies to consumer demand, and market leaders in their niche. Demand for more soaps and creams from Unilever or packaged water from Coke will have increased demand for the packaging products also.
What is your overall investment strategy and how do others from financial services, automobile components and logistics fit in your portfolio?
We believe in the India growth story, and believe we will have significant increase in the GDP (gross domestic production) growth. We like to invest in companies which are proxies to the growth in the Indian economy. So, just like the consumer sectors, we also like the financial sector, which we believe is a levered proxy to the growth of the Indian GDP. If the average GDP growth is five to 10 per cent, then financial services sector will grow at a multiple of that - 10 to 20 per cent. Our investment in retail-focused non-banking financial company Au Financiers reflects this.
Further, another proxy that reflects GDP growth is the broader logistics sector. As economy grows, there will be many economic activities that will require logistics support. The country does not have many organised country-wide logistics companies. The national footprint, as well as the trust within the Mahindra brand, is the real reason for us to partner with Mahindra Logistics.
We also like Indian companies, which are highly engineering-focused and are globally competitive. We believe manufacturing in India will be increasingly more competitive to other locations, especially where engineering content is high. Bill Forge is one such company in our portfolio.
What is attracting global hedge funds to invest in Indian start-ups?
Classic hedge funds have what they typically call long / short strategy under which they invest in publicly listed companies. What these hedge fund managers are doing now is having 'side pockets'. And in those side pockets, they can do early-stage venture capital. Most of these hedge funds which are doing this have been very successful in backing internet and e-commerce companies in the US and in China. They are hoping to replicate the successful models in the Indian market. For example, the Amazon success has led to many other Indian market places such as Flipkart, Snapdeal etc. India has a billion-plus people whose consumption needs are rising. Combine that with increased internet and mobile penetration, and there is no reason to believe internet start-ups will not do well. However, a hedge fund manager needs to ensure the fund selects wisely, as for every successful Amazon, there will be tens or even hundreds of failures where a lot of money will be lost.
The first half of this year has been one of the most active periods for PE in India. What does it indicate?
There is a lot of excitement around India and its potential. The country is currently the shining star among BRICS (Brazil, Russia, India, China and South Africa) and among most other emerging markets. The fall in oil prices along with other commodity prices, the lower dependence on exports, the falling current account and fiscal deficits as well as the strong mandate for the government have enhanced the attractiveness of the Indian market. Moreover, we as an industry have matured. Many PE players have learnt from experience and are now much more focused on areas like governance, exit and entry at the right valuations. All this has led to record investments in private equity.
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What is the investment status of your $540-million maiden fund and what are the plans for the second fund?
We raised the first fund only about a year and a half ago and have deployed close to half the amount in five companies which are all market leaders in their focus markets. Our focus is to deploy the rest of the fund very selectively in another five or six high-performing companies, even as we support and grow the companies in the existing portfolio. This will require dedicated effort from the entire investing and operating team for the next couple of years, after which we will shift our focus on fund II.
Your current portfolio includes two packaging companies. Any rationale for preference for this space?
We are sector-agnostic but our two broad themes for investment in the packaging companies have been around rising consumer demand and backing quality entrepreneurs. We are looking at companies that will benefit as the consumer story plays out in India. The most obvious ones are the large FMCG (fast-moving consumer goods) companies such as Unilever, Dabur and ITC; but they are trading at crazy valuations. So, we focused on companies which are either benefiting directly from the increase in consumer spend or which are very good proxies to this consumer demand. Both the companies in the packaging space that we invested (Parksons Packaging and Manjushree Technopack) are proxies to consumer demand, and market leaders in their niche. Demand for more soaps and creams from Unilever or packaged water from Coke will have increased demand for the packaging products also.
What is your overall investment strategy and how do others from financial services, automobile components and logistics fit in your portfolio?
We believe in the India growth story, and believe we will have significant increase in the GDP (gross domestic production) growth. We like to invest in companies which are proxies to the growth in the Indian economy. So, just like the consumer sectors, we also like the financial sector, which we believe is a levered proxy to the growth of the Indian GDP. If the average GDP growth is five to 10 per cent, then financial services sector will grow at a multiple of that - 10 to 20 per cent. Our investment in retail-focused non-banking financial company Au Financiers reflects this.
Further, another proxy that reflects GDP growth is the broader logistics sector. As economy grows, there will be many economic activities that will require logistics support. The country does not have many organised country-wide logistics companies. The national footprint, as well as the trust within the Mahindra brand, is the real reason for us to partner with Mahindra Logistics.
We also like Indian companies, which are highly engineering-focused and are globally competitive. We believe manufacturing in India will be increasingly more competitive to other locations, especially where engineering content is high. Bill Forge is one such company in our portfolio.
What is attracting global hedge funds to invest in Indian start-ups?
Classic hedge funds have what they typically call long / short strategy under which they invest in publicly listed companies. What these hedge fund managers are doing now is having 'side pockets'. And in those side pockets, they can do early-stage venture capital. Most of these hedge funds which are doing this have been very successful in backing internet and e-commerce companies in the US and in China. They are hoping to replicate the successful models in the Indian market. For example, the Amazon success has led to many other Indian market places such as Flipkart, Snapdeal etc. India has a billion-plus people whose consumption needs are rising. Combine that with increased internet and mobile penetration, and there is no reason to believe internet start-ups will not do well. However, a hedge fund manager needs to ensure the fund selects wisely, as for every successful Amazon, there will be tens or even hundreds of failures where a lot of money will be lost.