[YS Learn] India will always be an attractive market for PEs/VCs with more exit avenues - Shivani Bhasin Sachdeva, Founder and CEO, India Alternatives

In December 2020, homegrown Private Equity Fund, India Alternatives, sold part of its stake in TransUnion CIBIL Limited (“TUCIBIL”) to the sovereign wealth fund of Malaysian government, Khazanah Nasional Berhad, for Rs 340 crore, striking a blockbuster exit for its first fund. 

India Alternatives had invested in TransUnion CIBIL in 2015 and even after the exit, it continues to hold some stake in the company. Exits are an integral part of the investor, founder, startup, and business ecosystem. It helps bring in more capital, faith, and belief in the markets, founders and the models in place.

In a conversation with YourStory, Shivani Bhasin Sachdeva, Founder and CEO, India Alternatives, talks about the journey to the exit, and the key learnings and lessons for other companies. India Alternatives is a reputable mid-market domestic private equity fund focused on investing behind transformational themes in India such as women becoming more empowered as consumers. Shivani has over 18 years of global private equity experience in the US and India at top funds including GE Equity, Lightyear Capital and IDFC Private Equity. 

Edited excerpts of the conversation: 

YourStory (YS): Give us a background of India Alternatives, and how do you approach deals?

Shivani Bhasin Sachdeva (SBS): India Alternatives (IA) has stellar deal sourcing capabilities which it has developed over the years through the right relationships and partnerships. Our deal sourcing comes out of a focused approach to finding and backing the best companies that are the beneficiaries of transformational themes in India (themes given below), and then leveraging our solid local ecosystem of Indian institutions which forms our bedrock. 

India Alternatives is unique in that from the inception we have approached and roped in a large number of local institutions as our investors (this is similar to the best mid-market platforms globally). As a result, once we build a conviction on a particular company, by identifying the high performers within our investment themes, we can leverage our local ecosystem to source opportunities. 

We always have several companies (within each theme) that we maintain close relationships with and study closely. Therefore, when an opportunity comes up in these companies, we are able to act extremely fast. The themes and the underlying companies within these themes are what we have created by a painstaking bottom-up approach, and we constantly refine these or think about new themes. 

As a result, I am proud to say that sometimes we are the first private equity fund (or one of the first) to invest in that particular industry. CIBIL is one such example where we were one of the first private equity funds to invest in a credit bureau in the country.

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YS: Why is exit an important aspect of Private Equity? And why do investors need to get it right? 

SBS: Exit is a crucial aspect of the Private Equity ecosystem primarily to build credibility and capability. Credibility is important because any ecosystem must guarantee the ability to provide liquidity to investor, and the absence of it scares them. Capability is important because the system must generate exits/returns on a continuous basis.

During the initial phase of the last decade, there was some apprehension about getting exits from private equity investments in India. But, as the Indian private equity market has matured, we are seeing some strong exit traction. 

According to an EY report - From 2017 to 2019, in each of the three years, PE/VC funds have clocked exits of over $10 billion. From 2009 to 2019, Indian PE/VC exits aggregated $82 billion, of which 63 percent have come in from 2017 to 2019. 

Despite COVID-19, when everything was impacted for a few quarters, investors have been able to score good exits via select IPOs and open market transactions in 2020. Some of the notable PE/VC exits in the year were – Carlyle selling their SBI cards stake, and PE backed IPOs of Burger King and Mrs Bectors.  

Post the 2020 blip, IA believes India will continue to remain an attractive market for PE/VCs with more exit avenues. One potential game changer could be the ability of Indian companies to list directly on overseas exchanges. We believe the SEBI is contemplating this; and if it becomes a reality, one will see a huge boost to the exit ecosystem in India, which in turn will dramatically improve investor appetite for India.

YS: How do exits help both the company and the investors? 

SBS: Like we said before, exits help in building credibility amongst the investor community. Not only does this help build up investor confidence to re-invest, but it also helps the PE/VC funds raise more funds from newer investors who are looking at alternative sources to deploy. 

For companies, it helps build their track record and also attract investors of their choice who can support them on the basis of their size and scale. A company and promoter who can consistently deliver exits to investors is often given a premium in the market compared to their competitors. It also sets a strong benchmark for other PE backed competitors to deliver returns to their investors.

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YS: Tell us about the team, and what made you choose CIBIL?

SBS: At IA, we understand that the team plays a pivotal role in the success or failure of any investment, more so than any other factor. When we took the decision to back CIBIL, their team was a key factor; Satish Pillai, Rajesh Kumar, and the rest of the team continue to be the backbone of CIBIL. They are very adept at understanding the market gaps and leveraging this to roll out products for the market at the earliest – which is key. Sometimes, market leaders tend to get complacent but, the team at CIBIL have remained grounded and relentlessly continue to drive market innovation at an astonishing pace.

When we took the decision to back CIBIL, we knew that credit penetration in India was very low, and that India is a credit starved nation with huge potential for growth. This went well with our theme of 'technology re-inventing financial services as well as the behaviour of Indian millennials, who are not afraid to take on credit’. 

With banks and NBFCs increasingly leveraging technology, a strong technology player like CIBIL plays a key role in this market’s evolution. In the year 2008, there were one million applications for credit in a month; the same has increased to one million applications per day in 2019 (on the day of Dhanteras) translating to up to 30x growth. 

At the same time, the Indian millennial is ready to take on credit and to spend. We believe this credit disbursals will only continue to grow and credit information being a necessity, CIBIL will continue to be one of the pillars for this growth.

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YS: Tell us about your approach to investments and what you look for? 

SBS: We are a mid-market thematic fund. Typically, we back strong businesses that are fast growing and are looking for the right partner to help them take it to the next level in their growth story. 

Over the decade, we have identified over a thousand mid-market companies that fall into our select themes; and we are constantly refining these themes, questioning them or identifying new ones. We typically back companies which fall into the following themes:

• Women becoming more empowered consumers - Women control 60 - 80 percent of all consumption decisions, making them the largest addressable market. We believe Indian women are undergoing a period of cultural mindset shift of prioritising themselves in the family hierarchy. Increasingly, women are joining the workforce and are looking for products that make them feel special as well as improve their ability to balance home and work, making them even more of an attractive customer segment. 

• Increased focus on health and wellness - With rapid urbanisation,India is moving from infectious to lifestyle related diseases such as cancer, cardiovascular diseases, diabetes, hypertension, stroke, obesity, etc. Indians are also more prone to non-communicable diseases as well as mental health issues which we believe will drive healthcare demand going ahead.

• Technology reinventing financial services - Expected to have the 5th largest banking sector globally by 2020, India is going through a transformation with financial technology, providing innovative solutions for banking, payments and investments. Increasing digital disbursals driving credit boom, rising need for digital security of confidential information and tools to leverage blockchain to improve operations are some of the key sub-segments which will drive the next leg of growth in financial services.

• Millennials driving a paradigm shift in consumption – India is home to one of the largest population of millennials that are increasingly becoming globally aware. Young Indians are digitally connected to others across the world and share their confidence and optimism, demanding the best quality of products and services. This will be a key segment which will drive strong growth going ahead.

When looking at investments, we try to understand if a company has strong unit economics and grasp of their key customer or market segment; another key factor is the promoter’s drive and value system. Last but not the least, the ‘exitability’ of the company would remain key; someone should want to buy it at scale. This usually means that the company would need to have a highly differentiated business model.

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YS: Tell us about the fund and its approach and future plans? 

SBS: IA is currently closing out its fund raise in Fund II. We have raised this money as repeat commitments from our Fund I investors as well as select reputable Indian and global institutions. Over the last couple of years, we have exited three of the four investments in Fund 1, and made three investments in our second fund that we are very proud of. 

Besides, CIBIL, which we re-invested in, we have made an investment in NSDL (India’s largest depository) and in Brinton Pharmaceuticals (India’s fastest growing dermatology company). Post this, our focus will be to make quality investments in four to five opportunities, and work with our Fund 2 portfolio to continue to help them reach and maintain market leadership positions in their domains.

YS: What does 2021 hold in store? 

SBS: We believe that things will gradually get back to normal this year. While there is optimism around the vaccine and India announcing two different vaccines, this will take a while to reach a large percentage of the population. 

From a private equity perspective, I believe that the pandemic does not mean that now all companies in a certain sector will do very well, while other sectors will not. For example, edtech - a darling of all investors now. Of course there are brilliant companies in this sector as there will be in others. What’s most interesting about the last year is that it has highlighted some of the traits that we always look for in companies. 

The first being resilience - we have always believed that companies with strong unit economics and ability to leverage digital technology will be better able to withstand any undue shocks. This has come to the fore front during the pandemic. We are excited about the fact that this is now a clear focus of the entire industry. The pandemic does not change the way we invest, but it has suddenly brought resilience into the limelight. 

Now even early-stage venture investors are scrutinising their portfolio for the ability for cash flow generation and unit economics, and a focus on core fundamentals. If you look at the kind of companies that have become unicorns in the last year– out of the 11 Unicorns in 2020, several of them (such as Pine Labs, Nykaa, FirstCry, Zerodha, Razorpay, Cars24) have disrupted traditional businesses by embracing digital presence with a strong focus on unit economics. 

This goes back to our core themes of women-oriented consumption, the confluence of financial services and technology and millennials. We believe this trend will continue and we see an increasing number of digitally driven companies focused on unit economics take the stage in 2021. 

We also think that this year will see some amazing innovation in terms of how to do business, survive with less, and really listen to your customer - leading to all sorts of creative outcomes. Across all venture and private equity portfolios, there has been a common theme of how to get more bang for your buck. Businesses have been forced to change and pivot their models to survive. 

If you look back at the last decade, the best companies are always born after a crisis. Airbnb which went IPO last year and reached a valuation of more than $100 billion was founded in 2009. Over the last decade, we have also grown used to technology products such as WhatsApp (started in 2009), Uber (started in 2009) and Instagram (2010). It’s hard to believe that all of them started off after the global financial crisis of 2008. 

We also believe that we will see many investments made during the pandemic playing out to their logical conclusion with the resumption of normal life post vaccine. On the exit front, as mentioned earlier, if SEBI allows our companies to list overseas directly, this will give a huge impetus to the overall venture and private equity ecosystem.

Overall, 2021 will be a year when the entire business community would have re-learned many of the things we had forgotten - core fundamentals, unit economics, clear value proposition to customers, and the ability to exit – so it’s a perfect time to be a private equity investor.