We didn't go into the market with a blind pool: Siddharth Parekh & Sumeet Nindrajog

Interview with Co-founders, Paragon Partners

HDFC Chairman Deepak Parekh’s younger son, Siddharth Parekh, and serial entrepreneur Sumeet Nindrajog are co-founders of private equity firm Paragon Partners. They recently raised $50 million in commitments, the first close of their $200-million fund. The childhood friends say announcing the first close is crucial for them as this is their maiden attempt. They talk to Shivani Shinde Nadhe about the focus, challenges in raising their first fund and the maturing domestic investor. Edited excerpts:

It has taken seven months to get the first close since you announced the launch of your fund in August 2015. Is the market difficult for first-time fund-raisers?
 
Nindrajog: We have been fortunate, as there are other funds in the market, which are yet to announce a close. We got our approvals in August, and from September to mid-February, we raised $50 million. The fund-raising market has been tight for a while. Although we were a first-time fund, we didn’t go into the market with a blind pool. Our approach was to do a deal and make them see the portfolio we want to build.

Parekh: Global fund of funds or larger LPs (limited partnerships) don’t look at first-time funds. The hurdle for the first time is higher. But, in our case, a lot of them liked our background. They liked the fact that we have done one transaction. They know what we can do. The fact that both of us know each other for long also gave them comfort. Hence, getting $50 million was crucial because now the foreign funds can be much comfortable.

You are targeting the domestic investor as well. What has been your experience in raising funds from them?

Nindrajog: There are not many capital investments in alternatives from domestic investors. But, that is changing. We felt, based on our network and the fact that we were a first-time fund, targeting this segment seemed appropriate. The fact that we have raised this amount, which has a good share of domestic investors, is a good achievement. Apart from Fairfax Group and some individuals from abroad, the rest is domestic.

Parekh: Domestic investors have invested more wealth in fixed income and deposits. The equity allocation is very small compared to global standards. If you want to create wealth, you need to have appropriate allocation and a mix of debt and equity. As that expands, you will see growth in investment in alternatives as well. We look forward to growing our domestic capital base in this fund as well as the others that will happen. With the start-up system, a lot of people are also investing on their own. Hence, the domestic investor is much more mature now.

What will be the split of allocation from domestic and foreign investors in the fund?

Parekh: We’ll close this fund by the end of this year. By then, we’ll have 75 per cent of the funding coming in from foreign investors and 25 per cent from domestic ones. One of the reasons for this is that foreign investors have a higher appetite to sign larger cheques. Their interest in India has been a bit subdued, but I think this will change.

You have already announced your first investment in engineering, procurement, and construction (EPC) company Capacite. Tell us more on the focus of the fund on sectors...

Nindrajog: We didn’t want to do what everyone else was doing. We want to be contrarian. We want to come in where valuations are attractive, where we can work with businesses and scale them up. We also felt that if we want to attract investors, we had to differentiate; to demonstrate that, we choose sectors that might not be in favour now, but can be growth engines in the next few years.

For instance, the EPC sector has not done well but Capacite has done well. The company was formed 3-3.5 years ago and it was touched Rs 1,000 crore in top line. It has orders in excess of Rs 5,000 crore and the company is liked by its customers. It is very customer-focused and quality-conscious. This makes the firm stand apart. It will grow 50 per cent next year. It’s an incredible team, with a professional background. We believe there are gems in every industry. Our objective is to find such firms.

Parekh: We would focus on ancillary sectors around infrastructure and suppliers to large projects, the renewal sector from a product and services point, and logistics players like cold chains. These segments are not covered well.

The health care and finance sectors are also your focus but those segments also have a lot of venture capital funds. What will be your strategy?

Nindrajog: In health care, we are looking at services delivery options such as diagnostics and more speciality clinics. We are also building a team, which will be more involved in scouting for deals in this space. One of the issues with health care is that as there is a lot of interest, valuations are a challenge. So, we have to be selective.
 
Parekh: I have seen the BFS (banking and financial services) space from Actis’ standpoint. Financial services has its challenges for PE because a lot of them are listed and you can only do PIPE (private investment in public equity) deals. We will look at the unlisted space and might do one or two PIPE deals.

What will suit us is NBFC (non-banking financial company). Within that, the most attractive is consumer lending business, where you can make higher returns on equity. You also have SME (small and medium enterprise) lending, housing finance, and unsecured consumer lending. Some of these are riskier, but they are all in growth stage. We have seen some deals in this space. We also like financial distribution (insurance, investment and saving products). There is a lot of tech-based businesses; we would like to focus on companies that are using tech to innovate.

What is the internal rate of return are you expecting?

Parekh: We are targeting standard PE returns, at around 30 per cent at deal level, and we want to give investors upwards of 20 per cent.