‘Everstone is bullish on platform deals’

Everstone Group, an India- and South Asia-focussed private equity fund, has stepped up its focus and investments in the Indian market during the last one year. The firm, founded in 2006 by Sameer Sain and Atul Kapur, has around $4 billion of assets under management through its PE and real estate funds. Dhanpal Jhaveri, Managing Partner, Everstone Private Equity, talked to BusinessLine on the firm’s investment and exit plans for this year, as well as the overall PE scenario in India. Excerpts:

Why is PE business performing better in India than the rest of the world?

What we are seeing in terms of more recent trends is that the private equity business is getting a lot more layered. Earlier, there was only one class of funds, which was doing largely everything from minority to growth capital to buyouts.

Today, you have early-stage funds that are doing venture, early-growth funds, late-stage growth funds and, finally, we have got large private funds like ourselves that are focussed on buying businesses, operating and running them and eventually, over a period of time, exiting them.

The market has become significantly larger. When at one point of time you would hardly see one $100-million deal a year, today, you are seeing multiple $100-million-plus deals a year.

The second trend we are seeing is, buyouts today are a much more common factor in PE investments.

What’s driving buyouts?

One driver for this is that a lot of entrepreneurs have built and scaled businesses. Beyond that, when they do not have a succession plan or want to monetise the value of their business, they look for buyers. It could be a partial sale where they retain some stake in the business. A lot of entrepreneurs are getting to a point where they feel, maybe, they are not in the best position to scale the business. PE firms today are demonstrating that. When we go in, work with businesses and hire the right talent, we can help the businesses grow to the next level. So it’s a combination of capital and talent, and not just capital. The second driver is basically, if you look at both Indian and multinational corporate groups, they are trying to figure out what they should do and what they should not do.

Any examples?

For instance, we bought Modern Food from Hindustan Unilever and we bought the payroll processing business of Aon Hewitt. Aon Hewitt had decided that this was not a business that they wanted to conduct globally. There are lots of such situations, which is driving buyouts.

How do you differentiate yourself from other PE firms ?

We do deals in a controlled environment — this is basically what we call a platform deal. Platform deals are where we find very interesting sectors that we think will have strong growth dynamics over the next 5-7-10 years.

They are either slightly newer sectors or sectors that are now reaching an inflection point with high growth opportunities. We then try to create what we call platform deals, (where) we buy a very small business and see how to grow it into a very substantial business over 3-5 years, or we start a business from scratch and scale it. I think we have done that quite well; we are seeing some other PE firms also wanting to do that now.

What was the first platform deal?

We started IndoStar Capital, our NBFC, from scratch. Then there is F&B Asia, which has the Burger King India business. We also have Ascent Health, where we are building a pharmaceutical logistics business.

These are the companies we are building from scratch into substantial scale. The scale will come both from organic and inorganic strategies.

Do you see more such opportunities in India for platform deals? What sectors are you looking at?

We will look at any sector where we see at least 15-20 per cent industry growth over the next five years and where the market is not fully consolidated in terms of competitors and is a fairly fragmented market.

Also, there shouldn’t be 2-3 very large players who dominate the market. But there should be an opportunity to create a regional or a national champion over the next 3-5 years — a potential market leader of business. We have done consumer, financial services, food, etc. I don’t think this would be like a core industrial type business, because the challenge is, returns. I would say healthcare, financial services, consumer; these are all where I think platforms can do very well.

What is driving these kinds of deals?

It’s a build vs buy decision. In many situations, it is extremely expensive to buy because the few companies that are doing the business are valued extremely high. So if one has the confidence to build it, you are getting a business at a very low valuation, building value and then exiting when the market values these businesses. Because you are putting capital at basically zero value, you’re starting to put capital in the business and then building it up.

How many exits have you had over the last year?

Close to 4-5, and we expect to do another 3-4 in the next 12 months, via listing one of our companies, secondary trade and strategic sales.

So it’s not a difficult time for exits, is it? Suddenly, there are so many IPOs happening...

Rather than difficult, it’s been a great time for exits. The capital markets have become extremely liquid and, to a certain extent, demonetisation has helped. A lot of capital is flowing into banks, insurance companies, mutual funds — into all kinds of saving products — and those saving products are being channelised to different kinds of investment opportunities. And with interest rates coming down, equity is clearly becoming a more preferred source of investment. I think a lot of capital is still waiting in the side-lines that even if the markets do correct, the capital is likely to come back into buying more equity. I think we are in the midst of a bull run and we haven’t seen the top yet.

Any new sectors where you see good investment potential?

India is many markets within one country; you can go and sell all kinds of new-age products and services. There is an India which is metro with lots of people focussing on masstige and prestige and various kinds of luxury businesses on the consumer side.

On one hand (in terms of financial services), home loans are available at 8.35 per cent, and, on the other side, people are also taking home loans at 15 per cent. So we think that good business is all about execution, it’s not really as much about strategy.

So we don’t just look for the right sector, we look for the right business, the right team and their thought process on execution, and what they are likely to do is the right way to go. So I would say strategy is 1 per cent and execution is 99 per cent.

Are there any further fund raisings on the cards

Nothing immediate; we have a fair amount of dry powder left in our third fund

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