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The unconventional VC investor | Abhishek Sharman @ Carpediem Capital Partners
350 Plays2 years ago
This episode is a myth buster and a must-listen for founders who are seeking to build sustainable long-term businesses. Abhishek talks about his contrarian approach towards investing and his investment thesis built on the India's consumption story.
Read the text version of the episode here.
Read more about Carpediem Capital Partners:-
1.’Great time to create long term portfolio’
2.Indian mid-market PE firm Carpediem Capital looks to close Fund II by next month
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Transcript
Introduction to Carpinium Capital Partners
00:00:00
Speaker
Hi guys, this is Abhishek Sherban. I'm the founder and management director of a private company called Carpinium Capital Partners. We are a consumer and services oriented fund invested in sustainable businesses, which are either trying to create a consumer brand or trying to create an organized service.
00:00:32
Speaker
The typical way of thinking about a venture capitalist is that he is looking for companies that will give him a 10x return. In fact, a common mantra in the VC world is, go big or go home. There is rarely space for stable profitable businesses growing at 30-35% in the typical VC world.
00:00:49
Speaker
Which is why this episode is a myth-buster and a must-listen for founders who are seeking to build sustainable long-term businesses. Like many people
From Inspiration to Vocation
00:00:57
Speaker
of my generation, Abhishek Sharma watched the hit Julia Roberts movie Pretty Woman and he ended up being more curious about the role of her co-star Richard Gere who is a private equity guy in the movie. This inspired Abhishek to become a VC and the rest is history.
00:01:12
Speaker
In this freewheeling conversation with Akshay Dutt, Abhishek talks about his contrarian approach towards investing and his investment thesis that is built on the Indian consumption story.
00:01:40
Speaker
I started in 2005
Founding Carpinium and Building Skills
00:01:41
Speaker
in a fund called Sun Capital Partners. Then I went to India equity partners. And then finally, at the end of 2013, I quit. And along with two other partners, I set up Carpinium. We've been operational since 2015. And that's what we're going to do currently.
00:02:00
Speaker
Okay, so tell me about the, you know, the kind of skill sets which you need to develop in private equity, like, you know, you spent your whole career there, when you joined, you obviously must have been asked you less as any fresher would be. So what were the kind of skill sets that you developed, which you feel people should develop to win the careers in this space?
00:02:24
Speaker
I
Maturity in Private Equity
00:02:25
Speaker
think priority equity requires a certain amount of maturity. So I think while some maturity happens with evolution as we are involved, but even within a peer set, I think some people are more mature than others. I think priority equity is certainly something that requires that because it's a business, it's in some ways a strange kind of business because you are dealing with a lot of other people.
00:02:52
Speaker
You're managing other people's money, which you're betting on certain other people. So karma is not really in your hands. It's in the hands of many other people who decide to do what they want to do. And the rest of times, things are not in your control. So you have to build businesses recuriously. You have to have a physical sense of physical responsibility towards other people's money, because that's what they are looking at.
00:03:23
Speaker
So, it is a balancing act between a very sophisticated set of individuals or institutions who are large enough to be able to write with checks and putting in a lot of figures who you think have the future potential of becoming big.
Balancing Passion and Detachment
00:03:44
Speaker
And therefore, you have to be able to manage the tool, which requires a lot of patience because you are digging
00:03:55
Speaker
Whereas you do be able to look beyond what is obvious and see the potential of what things can be, which may not be very easy to see now. But some of it is objective, some of it is subjective. And you put that into a decision-making framework and then realize that whatever decision you have made, there's only a probability of success. And you will go wrong. And that's part of the business.
00:04:25
Speaker
But the only way to live life is passionately, so you keep on doing it. And if you're right more and more times than you're wrong, then you've done your job well. So I think it's the ability to do all your work and yet realize that there is only a certain chance that
00:04:51
Speaker
why we may have done everything that you could have, there is only a poverty attached to the fact that it will work out in the way that you want it to work out.
00:05:01
Speaker
So in a way, you're saying that you need to be passionate and yet detached because you can't get attached to every investment because you know that let's say only two out of 10 investments will give you like 3x, 4x, 10x kind of returns and two of them you might have to write off and so on. So like being detached is important to be an investor. I think being objective is very important to being an investor.
00:05:29
Speaker
You're right.
Execution Over Ideas in Indian Context
00:05:31
Speaker
I think somebody told me, which is quite parochial, but I think you get the gist. Somebody told me that your investments are like your daughter.
00:05:43
Speaker
Well, she's with you. She wants you, but you know that one day you have to let her go. I think, you know, it's probably not the best statement for gender equality. But I think it conveys the emotion very well of the way you have to look at your investments. What about
00:06:04
Speaker
Having a big picture perspective, I think the main difference between founders, especially first-time founders who seek funding is that they are very attached to their idea. Whereas the investor looks at the big picture and says, okay, it's an interesting innovative idea, whatever, but will it really scale up for that? And the investor needs to look at the bigger picture, the total addressable market and the trends and so on.
00:06:33
Speaker
So I think my perspective is slightly different. I think it's all about execution, or it's a lot about execution. I think the idea, the time, to a certain extent is less pertinent because in India there are many interesting forests. It also depends on the kind of things that we're investing in. So we are what you call an early stage priority fund. So we look at which are between 30 and 200 gross in revenues.
00:07:02
Speaker
So by the time you are no longer backing just an idea, you're backing an idea, but there's also a certain amount of product market fitment and you have certain amount of execution. I think to me, you know, in order to make money, in order to get to a certain scale, because you know our success is not depending upon the fact that every company has to become a unicorn or has to become an apple or Google or so on and so forth.
00:07:26
Speaker
If you are looking for a 4X, 5X, you know, you just need to have a 10X position, which is that you need to capture the 3, 4X and the other guy is coming after you, he should be able to see a 3, 4X. And that, at the scale at which we enter into companies, is possible in a large number of sectors, with a large number of companies and a lot of all of us.
00:07:47
Speaker
But I think what people don't realize, and what the founder community probably doesn't realize, is that in order to visualize something where nothing else exists, you need a founder. Because you need an unreasonable man who needs to be dashed to an idea, who needs to make it work despite all the naysayers and everything going wrong. But to dig something from 0 to 100 is very different from digging something from 100 to 1,000. And that requires
00:08:13
Speaker
the whole process of institution building to kick in. Team processes, they were able to let go. They were able to say that I would intervene only in certain ways through certain people at certain points. And I would not like to be at the forefront of each and everything, so to say. So that realization is very important.
00:08:39
Speaker
That commitment to institutional building is very important. And that focus on execution is very important. So there are some funds which have this philosophy of go big or go home. So you are saying that that is not your philosophy. You are not looking at one or two of every 10 to be outsized returns and the others that you don't care much about.
Stable Returns Strategy at Carpinium
00:09:02
Speaker
That's not really how you operate. Yeah, we are looking for micro-balance. We are not looking for maintenance ever.
00:09:10
Speaker
I'm not much of a cricket follower. I don't know the other name that you mentioned, but I'm assuming that's someone who's a consistent player. Exactly. So we are looking for people who, you know, we don't like losing money. That doesn't mean that we won't lose money, but we don't like losing money. So you're right, our routine may be one or two don't work out.
00:09:35
Speaker
To us, at least making it 2x, 3x in every investment is important. Because we are not coming at the stage where we are not a classical angel or VC fund in the sense where we are coming in at the very inception. And we are also not seeking 20% month-to-month growth. We are seeking 25-30% year-on-year growth. Because our view is that there are very few businesses which can grow at that rate without the yields coming off.
00:10:02
Speaker
And, you know, that kind of disproportionate growth is only possible in certain situations, let's say, a deck platform is in digs of and so on and so forth. But most businesses, you know, in order to do well, in order to thrive, don't have a very high benchmark.
00:10:23
Speaker
I mean, if you look at the country like India, and if you came to India in 2010, and you saw a company called Julian Foodworks, it could be a $125 million company. At the end of the decade, by 2020, it was a $7 million company. I mean, if you came to India in 2010, you may not have heard of a company called paid industries, which sells jobs. In other words, by 2020, it was a $5.7 million company.
00:10:53
Speaker
a double or a pit light creates almost at SaaS company kind of valuations. And these are companies which don't do something which is very disruptive.
00:11:05
Speaker
So the great Indian opportunity, because we are largely India focused one, the great opportunity in India is that we are looking at probably the biggest accretion to the working population of the country that any country has seen across the earth at any point of time.
Tapping into India's Consumer Market
00:11:21
Speaker
This demographic is what we are playing most of the time. We are not playing necessarily a debt disruption.
00:11:29
Speaker
And therefore, the vantage point at which we look at business is that if you can build a consumer brand that appeals to people, or if you can build an organized service that appeals to people.
00:11:40
Speaker
which can target the large middle class, apart from the bottom of the pyramid. At the very bottom of the pyramid, you don't have purchasing power. But if you were a little bit above, I would say the bottom center of the pyramid, if the product or service which is relevant for that segment, you can really build very skilled up businesses. And these are businesses which can grow for the next 20, 30, 40 years.
00:12:04
Speaker
And at that point, in that category, you know, you can play, I would say, a little faith. You don't have to play everything like you did with your, you know, I mean, you can, 50 overview. But you play it, I would say 50, 50 overview, kind of. Interesting. So, essentially, you're placing a bet on
00:12:30
Speaker
deeper capita income rising, more people coming out of poverty to middle income, middle class, and that middle class driving more consumption, consumption of services and products. And so that is what you are placing your bet on. So we are at the confluence of two data points. One is what you said, which is greater consumption. You know, we are, we keep talking about $2000 per capita GDP to $5000 per capita GDP.
00:13:00
Speaker
Now, whether it happens at five years or eight or nine, that's that's less than right on value, but that actually that's why we are quick. Important part is a lot of this incremental purchasing power and therefore a lot of these incremental spins are going to come into consumer distribution segments.
00:13:16
Speaker
So the Raman Rishan has been taken care of. This is not going to go to Dal, Chawal, and Roti for Prabhagavas. But it is going to go to categories which have so far not been focused on necessarily, because your core spends were always for core things. And the incremental spend now, therefore, has a huge autistic curve.
00:13:38
Speaker
I mean I talked about pizza as a category who would have thought that in India you would have such such pizza company that we talked about jockey in a way. I mean if you look at Maruti cars, I mean Maruti's, Maruti Suzuki is more valuable than Suzuki. And we think that many categories, for example we think women's shoes is a category, we think pet services is a category, we think funeral services is a category. These are all categories which we think are going to explore. The other data point which is important is that what is the bulk capital element of it?
00:14:09
Speaker
the number of households of a country is actually greater barometer of consumption rather than population. So what's happening in India is what I call a nuclear family revolution. So India is moving from a joint family ecosystem to a nuclear family ecosystem.
00:14:32
Speaker
And then one household has become two households. You know, if you're two brothers living out of the same location, two brothers were living separately, spending goes up by a factor of 1.6 to 1.8 days, because you need to owe everything. And that is a greater barometer of how consumption is going to move, rather than the fact that we are operating for billion, it is going up by 8% per annum. And that is what people decide on. So, because we are going to see more number of households,
00:14:59
Speaker
and because we are going to see more per capita income. I think we are going to see both volume as well as propensity to spend increase.
00:15:13
Speaker
So, we have the confidence of those two points and therefore, there are certain sectors which will grow much more than others. So, maybe a guy who is making rice will make more rice, but his growth from a base level is going to be lesser than somebody who is a pet services player and the base effect that he is going to see and the attrition. Got it. Interesting.
00:15:34
Speaker
So tell me about the journey of starting up on your own. What made you want to leave India equity partners and start on your own? So I think that's the natural evolution that everybody seeks. I think the more interesting part is how did I think about private equity.
00:15:55
Speaker
But that story a little bit. And what happened was that I was a student at Delhi. And I had gone to ideal. And actually I had gone to Delhi after being in smallish towns like, you know, Laokida and so on and so forth. And, you know, we were not initiated too many English movies.
00:16:19
Speaker
And when I went to IIT, computers happened. And so in my first year, I went to middle place in Delhi and got assembled a computer piece into myself. And we used to get all kinds of movies in all kinds of ways. We watched a huge number of movies. And all the movies I watched were the movie called Pretty Woman.
Influences from Early Career
00:16:46
Speaker
Obviously, you liked what Widget Gay did for many reasons in Julia Roberts. But what got my attention was that, what does this guy really do? And I was in the first-in-college. You know, you live in Austin, you go to your seniors. But they didn't, you know.
00:17:03
Speaker
and anywhere you look up to them and I went to many seniors and you know most of them were not able to articulate until I bumped into somebody who couldn't and he said there's something called private equity and you know and that resonated right that resonated that you know he's a guy comes he you know takes companies by then takes their bar does various kinds of things in the process of other stuff and
00:17:25
Speaker
And so, therefore, I am probably one of those people who have done nothing else in their lives, but privately. In that sense, I'm quite unique. You know, I haven't come across people who have done that, which would also be a weakness, but that you know nothing better. So that attracted me to priority.
00:17:47
Speaker
And there was always a desire that I had, not to join large platforms, but be part of platforms where you could join at the very inception, very beginning, and, you know, sort of, sort of, you know, make it your own, or go to the absolute top.
00:18:03
Speaker
Rather than looking at a US-based rivalry fund where the bosses sit in Boston or New York and you're in India and you're spending a lot of time taking out the India story and why India makes sense. So, you know, I think that you spend a lot of time doing stuff that, you know, it just understood and should not be core of any investment thesis. And that is why I chose the kind of rivalry fund that I chose to be part of.
00:18:30
Speaker
That's probably why after IIT you went straight to NIAM because you had no intention to really take up an engineering job. I was not great at it. I mean I would have been very lousy at an engineering job.
00:18:44
Speaker
I went to IIT, I didn't go to engineering. Engineering never fastened. That was the reality. And the good part of IIT is that more than what they teach you at IIT, I think you get to test your mettle against some very, very smart people. And that holds you steady. You know, when you're doing life, you always be confident.
00:19:06
Speaker
And that is what I took out of IIT. And it was very clear to me, even in IIT, I went to Procter & Gamble for a internship, which was a great, great institute. It taught me a lot. I took about 64 days in a plant, which made aerial and tide. And I tried to move the making machine and the packing machine up to each other.
00:19:32
Speaker
While it was a general problem, the solution for it was basically, you know, take a bunch of people along, somebody comes with technical experience, somebody who can do the problem definition well. So it was ultimately a managerial solution. And I felt that I had a lot of logical sense. And that itself is a rare commodity in life, as you all figure out. And therefore,
00:20:02
Speaker
To me, going to a management or going to a B-School was a very natural processing mission. I could have gone to a consulting firm like a McKinsey B-School, or I could have gone to a B-School. I couldn't do the first, but I could do the second. I went there. And then, as rightly said, you know, so that transition was natural for me, and then because I wanted to
00:20:26
Speaker
private equity, you know, that the first chance I could get, I decided to go there, chose firms which were not necessarily the biggest brands, but where I could be, you know, more relevant, and understand the disproportionate amount of responsibility and experience. That is why at the age of 33, I decided that, you know, I could try and do something which was my own, because the bigger issue was raising capital.
00:20:54
Speaker
And then it was clear that if I could raise capital, I could do the rest.
00:20:59
Speaker
Did the India equity partners experience shape your investment thesis? Like what was the investment thesis there? What kind of companies were they investing in there? The India equity
Lessons from India Equity Partners
00:21:08
Speaker
partners was fairly diverse. They did investments which ranged from $10 million to let's say $35-40 million. I always focused on, because I wanted to be independent,
00:21:28
Speaker
I wanted some responsibility. I wasn't very senior, so probably wanted to give me a lot of responsibility. So I ended up focusing on doing something new, not reducing the consumer and services segment.
00:21:40
Speaker
And some of my investments where I was part of the team and it turned out very well. One of the investments I made was in a company called Manapur Finance. And we wrote Manapur Finance from a company that was 400 crores in your loan book to about 10,000 crores in loan book. So the company in public created a great value almost at 7x in cost and currency terms.
00:22:08
Speaker
over a five and a half year period. So that was a great experience. Then I was on the board of this company called QuestCorp, which is now a district company in India's second largest private sector employer, employers close to 450,000 people. And from its very infancy, we went through some very tough times because we invested and then legal went down. Nothing we did that, but we got in back to, we kept supporting the company. The company turned around,
00:22:37
Speaker
quite well. In 2013, we sold the company to Fairfax. We made it 40% close to 40% higher. We thought we had done a good job. We saw Fax making 16 next week in public three years later. And then all those things are great learning. So I was associated with a few companies that did quite well. India equity partners, obviously, made 16 investments across the board, very diverse.
00:23:07
Speaker
But what it did is it gave me a very good vantage point in being able to see what works, what doesn't work, you know, what are the elements that I really want to follow. And what it did is that you borrowed what you ought to have kept. Obviously, it is also constrained by the amount of capital you could raise and what you can follow and so on and so forth.
00:23:31
Speaker
But it very much was the edifice of the food elements of the equity partners was very much the edifice of what we created in company. So what did you learn about what doesn't work? So I think one doesn't work is cyclicals from a sector perspective.
00:23:54
Speaker
What does that mean? It is very difficult from private equity point of view to be able to time cycles. Why are these businesses cyclical? Because their output prices are linked to commodity prices.
00:24:18
Speaker
the output of private into commodity cycles. If steel goes
Navigating Indian Promoter Relationships
00:24:22
Speaker
up, it goes up. And if steel goes down, it goes up. There's nothing that you can do about it. The whole element of, if you go back to the result of private equity, private equity is supposed to be able to generate alpha for you, which is an element of return, which is not linked to the market. And the core of it is access to operations of the business.
00:24:45
Speaker
So if you look at the classical private revenue funds, which have become large, they have now become more asset gatherers rather than private revenue funds. You know, they started by buy-about companies, right? You know, so if when a black store buys the Hilton hotels or somebody buys the one elevator, they take these companies, they install management, they're going to fundamentally make changes that can, that is supposed to increase the operational efficiency of the business.
00:25:13
Speaker
So in private equity video with that bite said, you don't want to buy a 6% ownership and a roller series B preferred stock in the company, your own businesses.
00:25:27
Speaker
And therefore, we said that cyclicals don't work. Small minority stakes don't work. Line reliance on entrepreneurs or promoters at the quality of India doesn't work. Because in India, you don't have a board on mechanism also trying. You are backing these unique individuals called promoters, which are a combination of founders, shareholders, management role into one.
00:25:54
Speaker
So the challenge in India is to manage the promoters, the opportunity in India is to partner with the supreme individual's work for promoters. And therefore, you want to be very careful about the kind of people. So to me, it was important that in India, you can't be passive. You can't say that, oh, he's a great guy, he's in the mystique jobs, and I'll give him some money and make a billion dollars out.
00:26:21
Speaker
Indian is also a tough country to business. There is the environment which is tough. You know, making profits in companies is very tough. There is so much taxation that I think that you're dealing with. You're dealing with so many regulatory and compliance hurdles. So we said there are some elements that we want to take care of. We want to back first generation entrepreneurs. We don't want to back partner with families. We want to take... Why not partner with families?
00:26:50
Speaker
Because you
Supporting First-gen Entrepreneurs
00:26:51
Speaker
know what's happened is that if you look at wealth creation, it is moved from being generational to a single decade. The logic of partnering with families was that, you know, there are certain business families who know how to build businesses. So Dhirubhai Ammani starts a business, Mukesh Ammani takes it to a certain level and maybe the next generation takes it to that same level.
00:27:14
Speaker
And, you know, that's no longer true. Elon Musk is the richest guy in the world, and he's not a family of business, neither is Jeff Bezos. In India, I went to IIT to look at a lot of people, my type, my juniors, my seniors, you know, people who have done well, such a good person, being Flipkart, depending on the records of Matt Wahl, with the Rofors, Sujit Kumar at Flipkart, all that. You know, in one generation, non-no-wealth has been created.
00:27:42
Speaker
You don't, so the whole idea about partnering with families was that they know how to build businesses. And businesses get created over generations. That is no longer true. One good entrepreneur in a period of as small as five, six years can play a huge role. So if you want to back individuals,
00:28:04
Speaker
And they could be professional, professional entrepreneurs. So we love professional entrepreneurs. People who know the business, they don't have the capital, but they understand governance, they understand the fact that, you know, how to treat industry capital. And you'll back them and you work with them in the make-up break-inings, you know, when 90% of the networks are inside the company. And what we do is we take meaningful stakes, 26% plastics in these companies.
00:28:33
Speaker
spend a lot of time in this company. We like to spend about three, four days a month with these companies. So if somebody likes, somebody feels that they're interfering or what have happened, then we are not for them. With the whole idea being that, you know, when we back these guys, we are co-building businesses. We are not passive. We are business partners. In 3.08, portfolio companies fund when we are the single largest share rules ahead of the road.
00:28:59
Speaker
Yeah, we are, we are always a second voice in the company, the most dominant voice in the company is always the entrepreneur, right? And we said that we, we want to, we want to not only get investor money, but we also want to get customer money. We like to say that 20% of the sales of the companies come to us.
00:29:18
Speaker
We have won the financial control, we have won the employer, we have won the sanctuary order. So I was very hands-on, let's bring business together kind of style. Appreciate it. We like us. And therefore, we choose very carefully. And that also happens because we don't have a lot of investments. We do like two investments a year. We do about seven investments from the fund. None of our companies have a single rupee of government revenues.
00:29:49
Speaker
And we think, we think, you know, again, if you look at how many businesses have been built by providing services to the government, it may be a very small number, which has also been right. So, so we therefore have learned our lessons. We think that, you know, from a past life.
00:30:10
Speaker
My partners, one was the founder of Quest, the other was Hugh Domino's and a bunch of other companies. So because of that, I think we have a sense of how consumer service can scale up. That's the peak that we understand. We have a plan that works for India. And therefore, that is what you focused on. Okay, got it.
00:30:32
Speaker
You know, some of these things which you're talking about are not considered very fashionable today, you know, like I think what's more in fashion in the last two years is like hands off writing checks quickly kind of approach. Does this like hamper your ability to find the best investment opportunities?
00:30:59
Speaker
The period of time he does, because until we need to look at the pool of entrepreneurs, some of them do gravity to ideas where you can get high velocity, high valuation capital. So if there is a guy who is deciding to do entrepreneurship and he is a choice between building a sustainable business
00:31:24
Speaker
This is a choice of building a business where you can talk about multiple rounds of capital and each round value is higher. If they choose the other path. And that can happen. But that's why I think it's important to have a value and belief system that is very core to you. Because it is very difficult to hold on to it.
00:31:44
Speaker
particularly when you get tested. So if it is not very deep and not very intertwined with the core of who you are as an investor and what you embrace in the philosophy, it is going to get tested. There's actually no doubt on that. But my point is that you can make money by doing whatever you do, profitability as the new ones. But these are not blinding insights.
00:32:11
Speaker
you know that at some point of time sooner or later business has to generate cash. One can have a view on what the cleavage is and I can understand that in the world let's say if you are big interest rates and you say that there was a world where we were looking at a zero interest rate environment where capital today versus capital 10 years down the line had no difference because the discounting rate was zero.
00:32:33
Speaker
you could have taken a much stronger view. Today, when the discounting rates are going up, because inflation is going up, and interest rates are going up, you certainly feel that cash today is more important than cash tomorrow. But the fact that cash is king, the fact that profitability is good, is not new. It's just that suddenly, we would believe at some point in time that this time, it's different. And this time, it's a new world. And to me, it's a pendulum effect. You can deviate from the me.
00:33:03
Speaker
But the meat remains the meat.
00:33:06
Speaker
So there's a period of time for which you can focus on certain other things because the word is being so free as COVID happening, you know, philosophy is changed. But in the long run, even on all those things, there are certain truisms, I think, which hold. Therefore, what we practice is nothing which is biting inside, to be honest. This is what many people at these points in time. It's just about being able to execute on it.
00:33:35
Speaker
So you said last year, companies are overvalued. What is the way in which you value a company? I mean, because you are, in a way, taking a bet here. So how do you really value a company? How do you decide this is the fair value for a company? Are there some rule of thumbs, like, say, 3x of revenue is a fair value for this kind of business, or even stuff like that?
00:34:04
Speaker
So what we do is we look at imprinted abilter multiples. So abilter is earning before interest tax, implicit amortization. It is, I would say, a proxy for operating income for business. I need to be a bit, but even those technicalities aside. So business operationally, what is the kind of way the business can be?
00:34:29
Speaker
Now the state at which we come in is when the business is sustainable. So we like to bring come into a break even on positive business. However standard not level at which they are showcasing their end state of it done right. So let me give you an example let us say when I invest in a in a FMCG kind of company let us say the company we can get jobs and sources. Now there is no point me looking at a Heinz kind of multiple because the Heinz is a very mature company and it makes
00:34:59
Speaker
let's say, loss of a bidder, and it gives value and price to an initially immediate bidder. But I also want to look at a situation where I go and say, oh, it should be three times sales or four times sales. So what I will do is I'll say that, let's say, here is a company. It has got 50 course of revenues. It is profitable. It is making, let's say, two, three course of a bidder. Obviously, it's not making a steady-state a bidder. Now, I would say that, let's say, this company, when it gets scaled up, will make a 15% a bidder margin.
00:35:31
Speaker
I let me give the full benefit of that at the scariest at which it is. So I will say let's assume that at 50 gross it makes 15% of it. And what multiple would that give me? Unless the stock goes at 15 times a bit down. It would mean that I should give the target 2.25 times enterprise value to sales market.
00:35:55
Speaker
Now the company is not making a bit of arguments and then I would say that that is what I will give it on a full basis and I would ideally want a little bit of discovery and that is my own negotiation. But while I effectively give it a sales margin which is 2.25 dead sales, the question is what am I not giving the full dead sales margin. To me because we all have to look at management with the logic that work for us.
00:36:21
Speaker
Well, PC was the new company, because the value is zero. So they come with, let's say, it's multiples and fraction multiples. I located greater than multiples. And I would like to give the other people a benefit of that. But at the same time, that to me is the absolute maximum at which I would give the price.
00:36:43
Speaker
If a company, for example, is a personal capital, which is a 70% gross margin business, I can't tell you what, 30% of a dollar that's registered. I would deal with it very differently, you know, in terms of the EV to sales multiple. But the EV to sales multiple has been, has been aligned at by gearing at included EV to market. Because to me ultimately this company has to be profit.
00:37:07
Speaker
15 times EBITDA multiple that you shared as an example it varies from sector to sector or what is the range like the multiple on EBITDA for which like the kind of valuations that companies get. It varies so for example you know if you are looking at restaurant sector you look at what are the restaurant forms right.
00:37:29
Speaker
When we did the HCLO company at Piryani Blues, you know, we looked at the comms that was there for listed companies in the food and services space.
00:37:38
Speaker
you know, and, and then you, if you're a big catch-up company like Aatna, then you look at what would be the multiples for that. I mean, you looked at a mobile-level refurbished company like Yansa, which is a business that is sold to Walmart. You know, we looked at what kind of multiples, services and that nature get. So obviously the concept for different businesses is different. That becomes the most pertinent way of having because while theoretically, you know,
00:38:07
Speaker
The value that the company has is a discounted value for the quad cash to regenerate, but it's very difficult to project future cash values. It's very difficult to sort of, you know, it's very sensible assumption that you take so often. CF etc. is a work of art. A concept and the concept done across cycles, not only at this point in time, but a concept done across cycles which gives you ranges that we, this particular industry is bringing back.
00:38:33
Speaker
But then sort of adjusting it for, you know, your company, the kind of margin that it is likely to exceed. And then providing a multiple on that is what has worked best for us.
00:38:47
Speaker
Yeah, by concept you mean comparable company set. Okay, so coming back to your own entrepreneurial journey, like in a way starting a fund is also like, you know, starting up as a founder yourself.
Capital Raising Challenges in India
00:39:03
Speaker
So you told me that you felt that the big challenge for you at that time was raising capital. How did you solve that?
00:39:11
Speaker
No, it's something which is tough at the best of times. Ring capital. Because India is a starved capital market.
00:39:27
Speaker
In the U.S., 90% of the private capital comes from U.S. In China, in some way back I knew the situation, over 50% was the private capital. So because your access to domestic capital is less, you have to go out and risk it. And therefore, large scale pool of capital, also capital,
00:39:52
Speaker
can only be raised if you are able to access global markets and that requires a certain set of things. For example, the global markets love people coming out of a brand. I mean, if you worked at Sequoia, and certainly you have decided to do more. Champs-vigay, I mean, if you go to the institutional capital, it's higher. You also saw a speed of managers who were actually based abroad, but not in India first. And they were able to raise large capital because
00:40:18
Speaker
because they were closer to the investor. And therefore, the investor felt more comfortable in giving them the capital rather than giving the people who are in India and who might know India better and who might be spending more time in India, but at the same time, because they don't know them. So capital raising, I think, is a work of art. It's very different from, I mean, obviously, when I went to IIT, I wrote an example, GE. I went to IIT. When I went to IIT, I wrote an example, CAT.
00:40:48
Speaker
Here there is an example. It's a lot of indigibles. You think that when you're surprised that a lot of captains of people are able to raise, you're surprised at how they do captains from others are able to raise. So it's difficult. But what happens is over a period of time it was a challenge. It was exciting. But this was one thing that I needed to learn. I mean, everybody wants to learn new things. So while I wanted you,
00:41:11
Speaker
investing. I mean, you never know, but you have a paradigm for investing. You had a batting for, you know, dealing with other news people. But this was completely linked at me. So it was very exciting at some level. It was very challenging. And I think what really helped is that we took the approach that any startup will dig, right? Startup will first put with friends and family around.
00:41:35
Speaker
I mean, there are some who started with seed capital for coal. Yeah, you know, one of them. So friends and family, getting people close to us. There's the first one, which was about to run for cross from India, largely. I think, thankfully, what happened is that there was an ecosystem of institutions in India, and there were a set of people in India who were willing to look at the asset class. Obviously, money got really small, so you had to look many different people, like that small small share.
00:42:02
Speaker
But I think the EIF regulations came in 2012. I think some companies, some institutions like Sydney, for example, in India, with a phenomenal role in sort of, you know, backing managers and creating that ecosystem, almost like a white community-backed strategy or something, you know, for five months.
00:42:25
Speaker
So that ecosystem also came along. I think India started doing a remote allocation. And we also got better at it. Today, we have investors from various different parts of the world. Obviously, the main step of the gap is still India. And it's been an evolution. I would not say that we still haven't even raised very large amount of capital. But that's the journey that we understand now. We are getting better at it. And if you ask me, it's not necessarily the biggest challenge.
00:42:57
Speaker
being the view, my view is that what happens is that over a period of time what you think of as challenges because you solve for them. Actually become lesser of an issue than you thought we were when you started out. But the set of things you did not see as challenges or did not count for actually become more pertinent bid points for you as type massive buy.
00:43:26
Speaker
So what are they now, these unaccounted for challenges? I mean, you know, when you start a private equity fund, you think your job is raising capital, finding great investments, and so on and so forth. I think when you run a business, you realize that for the people, there's been a very big challenge now. There was a time when, you know, just because you're offering a private equity job, you could almost get anybody interested, no longer the case.
00:43:58
Speaker
People, I mean, today, you know, youngsters, today, you know, those who are coming to the workforce have many more opportunities.
00:44:08
Speaker
Many of them think of the risk reward as being much better. And so entrepreneurship is probably the most attractive segment for people who are critical. Even in private equity, what has happened is that the big have become bigger.
00:44:29
Speaker
the skill at which to operate, what they're able to provide. It's very different for what an entrepreneurial priority fund can. So therefore, while you can give them equity, you can give them long-term rewards, there is a huge challenge in terms of being able to match what other people are able to provide. So I think more people are becoming a challenge. Out of time, you end up doing
00:44:59
Speaker
stuff which is a regulatory major about buying new stuff is admittedly actually a very large proportion of the time. Particularly when you are, you are also running a business, you know, I mean, you are not doing this. So the whole act of running a business takes a disproportionate amount of time. And you are innovating far lesser than what you would like on being stuff that you really like.
00:45:27
Speaker
sit with the other people, discuss strategy, sit with a counterparty and discuss and then negotiate a deal. There's a lot of other stuff which you existed, we actually used all of that. So I think those, your ability to not get tired by all that,
00:45:50
Speaker
Anyways, you know, defines your ability to be successful, you know, and not watch, you know, some of the poor things that you thought would be challenges. At least you realize that it's going to go long, you know. I mean, for any other employee, you know, you have a task that you want to do easier, you have to register to put full account. You do a good job of it.
00:46:14
Speaker
to get to that stage where you have an organization where each of us can do things that we really like to do.
00:46:24
Speaker
And the aggregate of that is enough for an organization to be able to fulfill all its objectives. And actually to our mind is the holy grail of being able to build a successful institution. You said only 10% of money raised by private equity in India is from domestic sources. Why
Cultural Focus: Business Creation vs. Capital Management
00:46:46
Speaker
is that? Because India, everybody sees so much opportunity. The largest families in India.
00:46:52
Speaker
If you go to Vadamudani or if you go to Gokeshwami, they will say, be the captain. And I'm a generator. Right. The Rockelfeller families and the Chanel families and the Bloomingdale families and the Cape Town families, they are the Wharton family. They are all creative businesses and now they are dynasties. So now the generations, the Nixon, the Jinnafs of that, they are capital elevators.
00:47:21
Speaker
They are not so much in terms of building, they are more in terms of managing. So, you know, they have gone to that phase. In India, we are still at the point of time that people are seeing huge ability to create dispositions once a capital. Generation business, you know, are seeing this as a point of time where you can, you know, create dispositions over the size of those companies. But that is the sequence of capital.
00:47:46
Speaker
Build out those seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's of seekers of the money's
00:48:15
Speaker
So in yesterday and so on and rightly so you know they are seeing there is huge amount of opportunities I mean money is just around some 80 billion dollar investment in hydrogen. So I don't think that you know they are going to have spare cash to give to people. So that is a challenge right. But I think it would be very different the next generation.
00:48:43
Speaker
Because that zeal is not a family zeal. There is nothing but a generational zeal. It deals with the individuals. And then as generations change, you know, some people decide that, you know, now I have a lot more to conserve than to build. I've built enough. And at that point of time, things will change. But at this juncture, because, you know, we are looking at a career, we are looking at a period of time which is eliminated, let's say, for the next decade or two.
00:49:09
Speaker
If you look at that period of time, I don't think...
00:49:13
Speaker
you can restrict yourself just to India in terms of your aspirations in those companies. So, take me through your, like the resume of Carpe Diem, let's say, like Fund 1 was the 100 crores, what kind of investments did you do? And did you get some credibility building with Fund 1 that helped you to raise a bigger Fund 2? And what Fund number are you at currently?
00:49:40
Speaker
So, we are in the process of raising fund 2 currently. So, we raised fund 1, we won equal in September 2016. Fund 1 does well. We are on an invested capital level back in the worldwide present day.
00:50:00
Speaker
What does that mean? Like because this valuation is like subjective or is it like based on actual exits or what like?
Success of Carpinium's Fund 1
00:50:13
Speaker
So we invested plus eight companies so we have time to let's say 2020 to deploy capital which we did then we have time to 25 to exit our companies. So one of the eight we have exited we have returned back
00:50:29
Speaker
48% of the capital of the fund on that one exit, we invested. We invested about a little over 24.7% gross in the other vehicle. We got back over 100. And that was in the swan for our other fund. That happened close to 30% down. The rest of the portfolio, we went five out of our other seven companies having markups.
00:50:53
Speaker
We invited rebel foods, which is the food inequality in our food service company called Briyani Blues, which was at 4.6, 4.7 X of where we came in. We have seen similar problems in our other companies. We were in a company called One Indian, where we got Islamic investments.
00:51:31
Speaker
So we have, we have portfolio of eight companies in one one, we have
00:51:35
Speaker
We have divested one, we have had approximately five and two other companies. We haven't raised further capital or profit because I have grown two and a half to three since we invested.
00:51:47
Speaker
So we think we are a portfolio where we may not see too many accidents, too many events. And which was in a particular difficult vintage, you know, we went through demonetization, we went through the limitation of the GSDG, we went through several years of COVID. And what we invest in is not strictly tech, you know, so we found challenges.
00:52:12
Speaker
But I think, I think we selected companies well, I think we worked hard on them, and others too, the way they have kept the zealot and kept the mojo going in tough times. And that's why, as I said, you know, the challenge and joy of India is to partner with this unique animal called promoters. So, so that's been, that's been a reasonable journey. I would say we are pretty satisfied with what we've managed to do.
00:52:43
Speaker
And we are building on our success. We are in the process of raising the seven core fund. We have built there. We have also invested in a couple of companies from fund. Also, the capital government started. Our aim here is to look at seven to eight investments like fund work. We are very close to these companies. We are not sure where we are.
00:53:09
Speaker
So, you said by 2025 you need to return the money. So, does that mean you need to sell off your stakes in those companies by then or like what does that imply? I mean, I am not sure yes.
00:53:27
Speaker
You know there are mechanisms, you get the extensions, you have to do that in conjunction with your investors in terms of the regulator. There have been situations where people have gladly
00:53:43
Speaker
extended. I think it was made prior to me which had not staples for a very long time, staples in the chain of retail stores in the US. That was very good. It was doing some 50-20% in media and so on so forth. In fact, there is no compulsion to sell.
00:54:00
Speaker
in India because there is a regulatory model also so there is a finite life after which you know even if investors want the regulator may not oblige. So I think we have to find solutions for these companies and there are many solutions generally. There are secondary funds, continuation funds so you move assets from one fund to another fund once you I mean you could raise funds when you say that you know I would buy
00:54:25
Speaker
assets are left out because typically what will happen in the primary style is that and then we have less and that the people have 100 investments in a portfolio and to find solutions for one of them is not always possible. I mean you can always write off investment but that's not a good solution to find. Certain things need more dive and you know the good part is that much like the primary market and the secondary market is also important.
00:54:52
Speaker
Sir, like your fund 2 could buy off fund 1 companies and return the money to fund 1 investors. That would be what happened. If you have to do that, then you have to waive the fund specifically for that. So, usually, walking up your fund 1 investment from fund 2, is it so fund 1 from fund 2 is bad practice? There is a way to do it. You have something called L-BAC, which is partners with the council.
00:55:21
Speaker
of day. Both the help gives into consideration. In a fair market, we should do something on that basis. But the usual solutions are that you either go to a secondary spot, and which can buy an entire portfolio, or you raise something called a continuation fund, where you say that I am raising this fund, which is a practitioners fund. It is going to buy it is offered one. These are the mythologies that we are going to follow while
00:55:49
Speaker
doing that because exercise which is leading with conflict. In our business, you have to be girls and seizes whites, as we call it. Because your money, you can do whatever you like, but you need other people's money. I mean, it's a long-term reputation.
00:56:14
Speaker
Many things can be done and some people may do it. I mean the best way to do it or the ideal way to do it is create a solution. But then you raise money specifying that this is what you are going to do. And then you have a mechanism in place which is fair for fun work.
00:56:32
Speaker
on the fund for where assets are going. I will share for investors of the continuation. So, I am imagining that the way your investments happen, it would be like a funnel where the top of the funnel would be you would be scouting or you would be receiving inbound applications and then you would have some sort of filter process and then there would be some sort of deal making negotiation happening.
Investment Funnel Process at Carpinium
00:56:57
Speaker
Tell me about that whole funnel.
00:57:00
Speaker
So finally is that in the first permit, we had more than 2,000 opportunities that kicked the road. And these are inbound. These are inbound. So we largely have three ways in which we get deals. One is that we do a lot of active exercises. Because we have looked at when evaluation of countries happened,
00:57:26
Speaker
what kind of categories they treated. We talked about some of that earlier. So we have a view that these segments are going to do well. Hypo segments you don't mind doing proactive, you know, scouting exercises where even through ourselves or
00:57:45
Speaker
by a political advisor, we go out and say that, let's scout for this kind of things. So that's one. We have a lot of LPs. Many of them are up close in India. They're not sophisticated businesses. They get a lot of deals. We sit now in. And the good part is that somebody who is in the trade, or somebody who is running the business, or that kind of business, has some fundamental interest, or at least a desire to evaluate the deal, and he's sending it to us.
00:58:17
Speaker
Uh, and thirties that we have a large network of boutique investment advisors and chartered accounts. Uh, who get us inbound news? We do these things on the scum a little bit because they are not, you know, fancy presentation made by, you know, but instead you got things where you have to, you know, go through 100 wars, go through, you know,
00:58:39
Speaker
whatever excel sheets of data that are sheeted with and sometimes you could really find that it is if you are governing through that through the time. So through all these three processes let us say we will go for some point one when one fails we will check more than two thousand things. Only 300 of them meta-objective filters.
00:59:01
Speaker
you have sold so much it does. Like that ticket or plus top line? I mean it was like before you found one, you found two, you wouldn't have it but yeah, your revenue cut off, your sustainability cut off, your stake, the jobs and so on. First generation entrepreneur and so on.
00:59:22
Speaker
And then almost 300, let's say we would have engaged actively, maybe we have done an advertisement call, poured through the numbers, in about 60% of these transactions, right? So let's say, you know, if you got 300, the number 180 of those results. And then after one meeting or one call, et cetera, that number would drop to, let's say, I would say 50.
00:59:52
Speaker
And we would have given those sheets out to tech companies. We did the leaders online and we nested it. So why last question?
01:00:08
Speaker
You know, we're like living in a new normal is what everyone says. How do you think you will change in terms of your investment thesis, your operating philosophy over the coming years? Do you see that changing or do you think that these fundamentals will stay as they are?
01:00:29
Speaker
We are looking at, I mean if I look at, when you say new normal, I think we are talking about, in the investing world we are talking about tech and we are talking about businesses which, so for us take his means to an end, you know people, processes, take capital,
01:00:46
Speaker
are needed to build a business. It is not that our businesses are bereft of debt or devoid of debt. This is the best tax tax that you can find. It is the pioneer in chef's period. We just took real food debt.
01:01:02
Speaker
I think for me it's not really just, you know, that you don't see it in the money. You know, one of the most free spaces has a, has built a SaaS product, you know, for the ecosystem, which has got great partnership. But to us, people, processes, tech, you know, capital, I mean, we need to see the channel of SaaS,
01:01:28
Speaker
We have to embrace it. But it's not a paradigm. It's not distillation. It's meat for the end. So we have to imbibe. I mean, for example, if I could guide a company, I think my partner Arvindal for example, he could guide a company in terms of how you should go about building your brand and what you could do digitally was not part of that.
01:01:56
Speaker
That means we invite. And you can't, in a modern day of tennis, play with a wooden racket. So you have to change the dice, but the philosophy doesn't change. We still think that if you want to do that, you can go to Silicon Valley, you can go to Israel, take his globe, but he's the instructor. And people who don't take it don't do well. From our perspective, we are looking at a very compelling home.
01:02:26
Speaker
very core to India, which is a market that we understand as Indians. I have an Indian on my street, you know, I went to India, I went to India, I stayed in India. The most compelling object that India can give you today is the demography, which you see, which all the spends, the spends and changes are going to happen, and the kind of plans and services which are going to be achieved. In the process of these getting created, we at least need to see our channel.
01:02:55
Speaker
We embrace tech and source efficiency. And we won't embrace that, our companies won't embrace that. But to us, you know, you can't embrace it at the cost of willing a sustainable longer business.
01:03:12
Speaker
And that brings us to the end of this conversation. I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at adatthepodium.in. That's adatthepodium.in.