Lunch with BS: Vishal Nevatia sees value in being sector-focused

The True North investment model is to take 51% stake in mid-sized companies and make them large, Nevatia tells Niraj Bhatt

It’s not just the firm’s rebranding that Vishal Nevatia has done this year, he has also changed his view on technology investments. As I meet him at his office in Mumbai’s Grand Hyatt hotel, he starts talking about the massive transformation that is unfolding across industries led by technology. He is fascinated by how traditional businesses are becoming digital or technology-oriented and digital businesses are going traditional. With Amazon looking to become closer to Walmart, and vice versa, the most successful businesses, he believes, would be somewhere in the middle over the next five years.

While walking to the hotel’s Chinese restaurant, we continue the conversation. “The transformation will be good for consumers as it will bring efficiency, but socially we need to figure out what it will do to jobs,” he says. Job creation in the Western markets has been a challenge for the last 20 years even without automation and artificial intelligence. “A lot of the social unrest and political uncertainty is because of that and though I firmly believe we will find jobs, we need to rethink the social order,” he adds. 

At China House, we are quickly taken to his favourite table at the far end of the restaurant. Nevatia, who is fond of all cuisines, has strong recommendations and for starters judiciously orders half portions of eggplant in spicy garlic sauce, edamame dumplings with truffle oil and mushroom dumplings. 

Nevatia’s firm, True North, believes there is value in being sector-focused and has specialised in the three verticals of financial services, health care and consumer. It now wants to expand into technology. “Five years ago we used to think that as we don’t understand technology, we should not invest there. Today, if you don’t do it, you will become extinct,” he says. Nevatia has started the technology journey by setting up an analytics company that will provide solutions to portfolio companies. “We believe analytics has to be embedded in each business but this would take two to three years before they are ready. Till then, the shared services firm will be the bridge,” he said.

I ask him about the implementation of Watson, IBM’s artificial intelligence platform, which I overheard while waiting for him in his office. He says it is being implemented at Manipal Hospitals in the oncology section. He does not want to comment on whether the fund is selling its stake in the hospital to Temasek, which has been in the news. 

In January 2017, India Value Fund was renamed True North, and the main reason cited was to differentiate it from other private equity (PE) firms. True North prefers to have control in mid-sized companies and owns 51 per cent in 80 per cent of its investments. Unlike other PE firms, where the team is largely made up of investment professionals, True North has 15 people in the business management team and 10 in fund management. At 14 years, the fund’s life is also twice that of the average PE fund. “If we can demonstrate that we can consistently build businesses across economic cycles we can gain the trust of investors and aim for capital, which is perpetual.” As a PE firm, he also has to generate liquidity for investors at periodic intervals. But he says there isn’t a conflict between the two objectives — the business can be built from a long-term perspective while the periodic liquidity requirements of the investor can also be met. “You will have to look at us with a different yardstick,” he says. 

The main course of French beans with Sichuan chilly, the signature braised eggplant, garlic rice and dan dan noodles is served. I ask Nevatia how he started the firm. He grew up in Akola, a town in Maharashtra. When he was 13, his father passed away and the family business of vegetable oil extraction and cotton trading went bankrupt. After receiving a commerce degree from Sydenham College in Mumbai, and completing chartered accountancy, he joined Arthur Andersen in 1989. After a decade, he felt that advising clients was not enough and wanted to do more. Around that time, Gary Wendt had quit as CEO of GE Capital and was starting a global fund. He had roped in Housing Development Finance Corporation (HDFC) and Ambit Capital’s Ashok Wadhwa to partner and the fund would invest $125 million in India. Nevatia joined as CEO for the Indian arm, but a few months later Wendt decided not to invest in India. HDFC Chairman Deepak Parekh supported him, with HDFC becoming the first investor bringing credibility to the venture, while Wadhwa said he would open doors. The firm, named India Value Fund Advisors (IVFA), was able to raise $35 million at the time of starting out, mostly from domestic institutions and a few family offices, and became the first such fund to do so in India. Nevatia tried unsuccessfully to raise more funds for the next two and a half years. “For the first five years we were considering shutting down the fund every quarter, and every time we came close to it, HDFC or Wadhwa helped with a plan,” he says.

IVFA struck gold in the Biocon initial public offering in 2004, which became 10X and even other portfolio companies were doing well. “This gave us confidence to raise the second fund, but that too was not easy. For nine months, I was travelling 25 days a month all over the world, but nobody was putting money in India at that time,” says Nevatia. After struggling to raise the second fund, he found a placement agent, who helped him raise $170 million in 2005. After that he hasn’t had to work as hard on raising money, and the last three funds have seen demand of over $1 billion without him having to travel. 

Retail chain Trinethra (later sold to Aditya Birla Group) and Radio City (sold to Jagran Prakashan group) were the first two investments where IVFA took management control. “What we have realised is that of the 100 entrepreneurs who have built good mid-sized businesses, only 20-25 have the desire or capability to make them big.” True North targets the 75 companies, takes 51 per cent stake, keeping the promoter on as chairman with a 20 per cent stake. 

The $2-billion fund has invested half its corpus in the last two years and has 18 companies in its portfolio. The ticket size is in the range of $50-300 million. The firm has avoided taking portfolio companies public as the pressure of investor scrutiny could be a distraction for the management. However, Nevatia wants to test a theory that listed companies have a better profile, which helps the business in different ways including acquisitions. The firm plans to list the small finance bank, which is a regulatory requirement, and the wired broadband business, Atria Convergence Technologies (ACT). ACT has grown its business at 50 per cent a year since the fund’s investment in 2008. From a revenue of Rs 50 crore then, its Ebitda (earnings before interest, tax, depreciation and amortisation) is Rs 700 crore today. Nevatia is also looking to start a fund that will invest $20-30 million in smaller companies and not take control. “The support that our ecosystem can provide the entrepreneur will be of a completely different order,” he says. 

Nevatia is also thinking of a credit fund, an infrastructure assets fund, but wants to wait before getting into stressed assets. Our lunch has ended and as we walk out of the restaurant, Nevatia says his immediate challenge is to hire the technology business head for True North and accelerate the investment process.