Paragon eyes institutions for larger cheques

Paragon Partners, a Mumbai-headquartered India-focussed mid-market private equity investor, will target institutional capital and offshore investors rather than domestic capital and high networth individuals for further rounds of fund raise.

It has achieved a first close of $50 million of its proposed $200-million fund, with 90 per cent of the money coming from domestic investors – financial institutions, family offices and HNIs.

Explaining the change in strategy, Siddharth Parekh, Co-founder & Senior Partner, says, “institutional capital, they can write larger cheques. It provides stability for the future. When you are raising your second and third funds, those institutions will have the firepower to support you. Based on your first experience with them, they will be most likely to come into your subsequent funds.”

The domestic HNI pool, according to him, is still a small component and private equity is a small portion of where they would like to invest. The HNIs are also conservative with their investing philosophy. “It was great that we got a lot of them into our first round, but going forward, we want to target larger institutions.”

On the fund raising scenario, Siddharth, who has experience in the private equity industry before founding Paragon last year, says India is certainly in favour, relative to other markets. Some funds may not have had a great experience investing in India because the last cycle in private equity was difficult.

From a macro standpoint, people are coming back and viewing India as an attractive destination if you are long-term, patient capital. “In that sense, there is enough interest, appetite from foreign funds into India. We are seeing a lot of interest and momentum in our fund raise, but first time funds have a higher hurdle. We are seeing people finding our strategy quite differentiated,” he says.

Adds Sumeet Nindrajog, Co-founder & Senior Partner, “what has helped is, we didn’t try to raise off a blind pool with no investments. We showed our first investment upfront. As we are moving towards our second close, not only do we have one portfolio company, there is visibility into potentially couple of more transactions.”

Paragon announced its first close of $50 million in March. It had announced an investment of $10 million as expansion capital in Mumbai-based Capacit’e Infraprojects Ltd, a real estate EPC player, in August 2015. Paragon has positioned itself as a mid-market private equity investor focussing on high growth companies in five primary industry clusters – consumer discretionary, financial services, infrastructure services, industrial and healthcare services.

It will invest $10-20 million for a total of 10-15 portfolio companies and invest in companies with revenues of $20-100 million, for a significant minority stake – anywhere between 15 per cent and 30 per cent.

According to Siddharth, Paragon will stay invested in the companies between three and five years on an average.

The exit options will be standard across the common private equity routes. Some companies may be candidates for a stock market listing. If not, Paragon will explore other options, including selling to a financial or a strategic investor, or even consider selling back to the promoters.

“We will obviously make sure we have certain rights which allow us to exit. But, we will have to be confident before we invest that we will have viable exit options for the company,” he says.

On Paragon’s strategy to focus on the old economy, Sumeet, who has been a serial entrepreneur and has private equity experience, says “if you do what everyone else is doing, how are you going to make your returns. We see an opportunity. This country is not going to grow 8-10 per cent on the back of tech focussed companies alone. It is going to need real businesses with real growth on the ground. We see there is rebound in these sectors. That is if you have a long-term focus.” The old economy companies, according to him, are also under-served. There are larger funds focussed on this space, but they write larger cheques. Paragon sees an opportunity in the space it wants to play in.

In the old economy, the promoter and family self-fund the business up to a point where they need external capital to grow. That is where Paragon steps in, says Siddharth.

“We are looking at some first generation entrepreneurs, who had some capital base, scaled up the business to a certain point and then bring in a growth capital investor. They are not start-ups, they are not early stage and are unlikely to have venture capital investors,” he adds.

But aren’t the old economy companies a little wary of approaching PE players? According to Siddharth, probably a majority of them will not want to have a PE investor on board, but given the size of the market, there are lots of companies looking for that kind of investor.

“It is our job to identify those promoters, entrepreneurs who are looking to scale, looking for more than just capital,” he says.

Sumeet acknowledges that old generation, family businesses where multiple generations of the family are involved in the business may be wary of approaching external investors, as they have already created wealth for themselves.

But, there is a whole breed of first generation entrepreneurs who are looking for acceleration more than just capital. He points out that in the past, the old economy companies had a credit-friendly environment and they could get loans easily to expand. Which is no longer the case now. They are now becoming much more receptive to the idea that they have to take on certain amount of equity instead of taking on so much risk from a debt standpoint.

Sumeet says the opportunities for investing are not hard to come by.

The trick is in being able to filter through the opportunities, find the right fit in terms of company, promoter and the promoter’s execution capabilities as the business grows.

What kind of returns would Paragon target? At the company level it will target north of 30 per cent, says Sumeet and adds “if we are able to return to our investors, between 20 per cent and 30 per cent, we would have done a good job.”

A fund which performs well, in the top quartile would aim to deliver those kinds of returns, he adds.

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