Interview with Joseph Rai (VCCircle) Imran Jafar (Gaja Capital)
Video transcript
Mid-market focused private equity firm Gaja Capital will largely stick to its investment and exit strategy for its third fund with minor tweaks in the education and financial services sectors.
“In the education (sector), we are prepared to hold for longer as opposed to five to seven years that we are typically used to,” says Imran Jafar, general partner at the private equity firm. Besides, Gaja Capital is prepared to invest slightly larger amounts in financial services, he says.
In a conversation with VCCircle, he also spoke about overall private equity and venture capital (PE/VC) investments in India, recent and upcoming exits and attractive sectors at present. Edited excerpts:
If we look at the overall investment environment, the PE/VC deals have fallen to 426 so far this year from 707 last year. How does Gaja Capital read this trend and do you think things might look up?
You have to see private equity over long periods of time. We are unlikely to surpass the peak of 2007 (for PE/VC excluding e-commerce) but there has been an uptick of private equity since the Lehman crisis and it is likely to continue. I wouldn't worry about the short-term blips that you see in one year or the other.
We understand that Gaja Capital made the final close at $240 million of its third fund in March. Who are the investors and what are foreign limited partners’ views on India?
We had a target of $225 million and surpassed it. I won’t say limited partners are lining up to get into India but long term investors are looking at India seriously. They are also looking for teams that are stable, teams of specialists, and managers with good full-cycle investment track records. Over the last four or five years, there has been a churn in the industry and that will continue.
What have been the major learnings from the first two funds that you would be applying for investments in the third fund?
This is our twelfth year of investing and our strategy has largely remained the same. We continue to be a team of specialists. We invest in four sectors – education, financial services, consumer and healthcare. Our strategy has been to invest in Series B and C growth situations. In the last five years, we have increasingly become comfortable taking control positions in companies. We see a huge opportunity for us in mid-market buyouts especially in sectors that we understand well.
How many companies have you invested in so far and will there be any change in strategy in terms of ticket size or themes?
We have made three investments from the third fund so far. The first is a company called Bakers Circle that supplies frozen dough to quick service restaurant (QSR) chains. The second company, SportzVillage, offers sports management services to more than 500 schools with 350,000 children and also offers sporting experiences as part of employee and customer engagement to corporates. The third investment is Suryoday, a microfinance company with a small finance bank licence. These investments are based on the strategy which we have followed in the last 12 years. The ticket size is roughly the same. In financial services, we are prepared to invest slightly large amounts and in sectors like education we are prepared to hold for longer as opposed to five to seven years that we are typically used to.
Gaja Capital has made partial exits from the blockbuster IPOs of RBL Bank and TeamLease services and we understand that you made healthy profits.
This year was a year of big exits for us. We've had four liquidity events – two of them have been through initial public offerings (IPOs) with public floats of both the companies seeing 68-70 times oversubscription. We have a third IPO coming up in this financial year. We invest in companies that can give us an exit through either public markets or strategic sale. We rarely invest in companies that can only be exited through one route or the other. Our exit strategy is to keep all sale options open and choose the most optimal one.
So Gaja Capital would make one more partial exit from CL Educate through the IPO route. Given that education companies that have gone public have had a poor record, what are your expectations from it?
We see CL Educate as a consumer company. It is a 20 year business that has made profits in 18 out of those 20 years. It is run in an institutional manner and is a board-driven organisation. Satya Narayanan R and Gautam Puri have created an institution that can grow for the next 20 years. We see it as a consumer company that happens to be in skills, jobs, careers and education. Our strategy is to invest as much as we can in a good company and hold on to it for as long as we can. Like we did in RBL and TeamLease, we will be selling a part of the stake in CL Educate and hold on to the remaining post IPO.
Private investment deals in the education sector has been pretty muted. The deal value has shot up because of the Byju’s deal. How bullish is Gaja Capital on the sector at the moment?
We remain very bullish on the education sector and our conviction stems from our 12 years of investing in the sector. This is one of our largest areas of focus. We have invested a substantial part of our capital in education and have done well. Our best investment return is over 20 times our capital and our median is between three and five times. Our message to entrepreneurs and investors in this sector is not to look at the euphoria of edtech in the Valley or in India, or conversely in times when investments drop. Just focus on investing in the sector for the long term.
You have also been an active investor in the finance sector. Now with demonetisation, will Gaja Capital explore opportunities in fintech startups?
We continue to remain interested in fintech and financial services more broadly. We are unlikely to get more interested in fintech because of demonetisation alone. In general, because of demonetisation, there will be temporary hiccups but it will do more good than bad for the country. I am personally excited about what it can do for financial inclusion in the country.
Which other sectors would Gaja Capital bet on?
Education is my top pick. There are sub-segments in healthcare that are looking very good. We look at niche hospital chains in states that are underpenetrated, niche pharma and consumables firms. But we largely focus on the delivery and services side of healthcare. Consumer and financial services are also attractive. Investors like us focus on the mid-market wallet. These are the four categories of larger spend. We focus on them and look for those companies that can appropriate value for long periods of time.