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March 27, 2008

“Indian PE industry grew too fast over the last 3-4 years” - Interview with Ashish Dhawan, Senior Managing Director, ChrysCapital



Venture Intelligence recently spoke to Ashish Dhawan who, over the last two years, has been sounding a skeptical note on unsustainable valuation levels linked to the ever-inflating public markets. What does he feel about the current investing climate when the public markets have corrected significantly? Read on…

Venture Intelligence: The recent correction in the capital markets justifies your caution on the levels it had attained. What’s your take now?

Ashish Dhawan: The credit and housing crisis in the US – which is still the world’s biggest market - will not get fixed in a short period of time; it will take significant time for the system to absorb it and renew itself. I have never believed in the ‘decoupling’ effect - on a medium term basis. Sure, in the long term, India and China are in totally different growth trajectories compared to the US. But in the medium term, markets here go up because of capital inflows. And capital inflows, in turn, happen when people are in a risk-taking mood.

I would say that the (Indian) economy will continue do well; growth may slowdown a bit but that is fine. Public market investors will be more cautious now and evaluate risk more prudently. This would lead to a more sober market compared to the hyped up market that we saw a few months ago.

VI: How would this impact PE deals including PIPEs?


AD: The problem is that when markets are down, the volume of deal flow can also shrink. Because entrepreneurs are valuation-sensitive, they may choose not to raise capital or may choose to go in for bank debt instead of diluting themselves when the markets are down. Expectations take a long time to reset; typically 6-12 months.

It would be difficult to do PIPE deals in the near term (because of the SEBI rules that mandate using an average price over a few months than the current market price) because the six month average works against us. I think at some point PIPE deals will become more attractive as public market valuations correct.

VI: You were particularly circumspect of the valuations in Real Estate. How do you see the sector this year?

AD: I think there will be a slowdown. In real estate, there is a lot of speculative capital. People are just hungry to own real assets, without thinking about all the risks. As more supply comes on line and as speculators get weeded out, I think it will lead to a cool-off in prices over the next 12-18 months.

VI: Have LPs changed their view on India?

AD: In general, they are more cautious. Over the next year or so, LPs would start shrinking their commitment to Private Equity. Imagine an investor who has a portfolio worth 100 and the public market accounts for 50% of that. Now if that public market component is down 20% or so (due to the correction), then automatically the proportion of Private Equity in the portfolio goes up because PE does not get marked down as quickly. In such a scenario, the instantaneous reaction of an institutional investor would be ’maybe I have over-committed myself to this asset class; let me cool off a little bit’. We are going into a phase where LPs will be more cautious and writing fewer cheques.

Having said that, I think India and China are still on LPs’ radar screens. The current problems are primarily in the US and European buyout markets. Venture Capital is still looking good and Growth Capital is still looking ok for many big investors. So there will be some degree of reallocation towards Asia. So, I don’t think it is terrible news for India.

VI: Will we see some control buyouts from ChrysCapital going forward?

AD: We would like to do control buyouts. It is one of the ways to deploy more capital. Having said that, I just don’t see the market moving significantly towards buyouts in medium term (i.e., 3-5 years). So it will be a component of what we do but not the majority of what we do. I think growth capital will be the sweet spot in countries like India and China for quite a while to come.

VI: You has been particularly bullish on BFSI – going by your investments in Centurion Bank, M&M Financial, Shriram Transport Finance, etc. However, you have not chosen to invest in the brokerage sector. Why?

AD: The financial sector has had a marvelous run over the last 3-4 years and the secular trend is quite positive. But valuations did go up too much, too quickly - like in all sectors. As for brokerages, I would have loved to invest three years ago. But (in the current context), we have chosen to remain cautious.

VI: You were one of the early movers to tap into infrastructure spending (via investments in Engineering & Construction companies like IVRCL and Gammon Infrastructure). What’s your take on the sector now?

AD: The country needs tremendous capital in this area. A lot of infrastructure investing is also driven by the fact that the government policy now is much more aggressive in terms of encouraging private public partnership. There is a fundamental game change that has taken place in this sector.

VI: Which sectors will you not invest in?

AD: We generally don’t do genuine hi-tech. We don’t do biotech. We don’t like technology risk. We don’t do oil and gas - we are not smart enough to know whether oil will come out of a certain well or not! We also generally don’t invest in commodity companies.

VI: Your portfolio has some companies that are family-run. What are the pros and cons of investing in family-run businesses?

AD: It’s hard to generalize – it’s situation specific. In every company, there is one driver. You always look at the drivers to see how good they are, how they have evolved, how ambitious they are, etc. There is lot to say about a family-run company because they tend to have trusted people that are pushing very hard for growth balanced with stability. However, one needs to be aware of issues such as hurdles to professionalization, infighting that leads to destructive returns, etc. We need to be cautious about these.

VI: How are you preparing for competition from the large global funds entering India? Does their entry change the dynamics of investment in India?

AD: I think it does change the dynamics. Firstly, what this means is that there is a ton more capital available here. It also means much more competition for every deal. You have to be nimble.

There is an advantage in having been around for a little while. You may be able to react to things more quickly. But none of the advantages are permanent. You have to keep reinventing yourself.

VI: One of the interesting trends in recent months is Limited Partners (LPs) seeking co-investment opportunities with their fund managers. What is your take on that?

AD: We are open to that. But given that there are only a certain number of good investment opportunities out there, unless the investment size is too large or there is some other specific dynamic, we would prefer to do it ourselves. Plus, it makes it difficult to explain to other LPs in the fund why one particular LP is co-investing with us.

VI: How will the Indian PE market look like in terms of deal sizes, number of players and transaction sizes in 2010?

AD: Over the next two years, the market will still be vibrant. There will be a lot of supply of capital, and transactions sizes will get bigger on average. Buyouts will probably start picking up.

A lot of big changes happened in the last 3-4 years: the industry has grown up very fast, something which would have normally taken a decade (happened here in a very short time). We have seen the emergence of global players, venture capital coming back in a strong way, real estate funds, infrastructure funds, etc. It was almost like the baby growing up too fast! I don’t see anything radical or transformational change happening in the next two years. The change is going to be incremental. We will have to make sure we learn to walk properly first instead of trying to run a race.