Global alternative investments manager, Investcorp, which recently entered India through an acquisition of the private equity (PE) and real estate (RE) funds businesses of IDFC Alternatives, a subsidiary of IDFC, wants to build a portfolio size of $1.5 billion in India over the next five years.
Founded in 1982 in the GCC (Gulf Cooperation Council) region, Investcorp currently has offices across Bahrain, Abu Dhabi, Riyadh, Doha, London, New York, and Singapore. It has an AUM (assets under management) of $22.5 billion, spread across the world, and is entering new markets like India and China with a view to doubling its AUM to $50 billion in the coming years.
The AUM of the businesses that Investcorp has acquired from IDFC stands at $450 million at present, and the global investor wants to triple the size of its India business as it sees a long runway for growth. In an interview with Fortune India, Mohammad Bin Mahfoodh Alardhi, executive chairman of Investcorp and co-chief executive officer Rishi Kapoor say that consumer-focussed companies, especially those that cater to grassroots consumption, are high on Investcorp’s radar vis-à-vis potential future investments. At the same time, it is not too excited about investing in India’s booming technology sector, citing “valuation mismatch.”
Why did you choose to enter India inorganically, as opposed to building your own portfolio from scratch?
Alardhi: We have been watching India for some years. We visited India around two-and-a-half years back and met some people and observed what our peers are doing. So when we wanted to enter the country, the choice was do we start from zero and go through all the hassles that you have to go through to build a new business, or look at growing something that already exists and is successful. IDFC obviously had a great track record and good reputation. We know Deepak Parekh very well and he is on our advisory board. I think we saw that IDFC’s business had so much synergy with what we are doing on PE investing and the RE funds space; it came with a fantastic team, and the acquisition allowed us to enter India from a position of strength from where we could grow further.
Kapoor: When we were researching on India, we identified two-three attractive sectors that we wanted to focus on. These were consumer-backed companies, which fit into India’s grassroots consumption story and real estate-backed lending. To be perfectly candid, we got lucky that, co-incidentally, IDFC’s alternate investments business was focussed on these two very sectors and they were looking to divest the business. One of the biggest risks of building something from scratch is around execution. You need to hire a team of disparate individuals and ensure cultural alignment with our global operations. But with IDFC we had a team that has been working together for 15-16 years and had an institutional mind-set.
What is the current, collective size of IDFC’s PE and real estate funding businesses and how do you intend to grow this?
Kapoor: In all they managed around $450 million. Roughly split evenly between PE and real estate. Each of these verticals, in turn, is split across two funds each. The PE investments business has seen four funds, two of which have been fully harvested, one is being currently harvested and the fourth fund is in the process of being invested. The real estate business has seen three funds, two of which are fully divested, and the third one is almost fully invested. So we will hopefully approach the market to raise capital for a fourth real estate fund.
Alardhi: The medium-term strategy is to take the current AUM and triple it to, say, $1.5 billion in the next five years. For this, whatever capital we need to raise we will. At the moment, raising some additional funds (around $50 million) for the fourth PE fund is on the cards.
Within the consumer space, what are some of the specific business verticals that you are looking at for potential investments?
Kapoor: Healthcare is one area that we are focussing on a lot. Affordable housing is something which has an overlapping relevance between our PE and real estate lending businesses. We only lend to residential real estate projects that are in the mid-market. We don’t fund ultra-luxury residential projects. And on the PE side, we have made a recent investment in Zolo, a venture that promotes co-living spaces. We are also looking at companies that enjoy discretionary spending from the grassroots consumer like an apparel retailing company that we have invested in. financial services is another focus area. We have invested in a company called InCred, which focuses on consumer and student loans.
The real estate sector is facing significant challenges in India. Demand has been slow to pick up and funding to the sector from non-banking financial companies has dried up. Do you see this as an opportunity or a challenge?
Kapoor: On the real estate side, we only do project-backed financing for residential projects. We issue senior, secured debt and collateralise the loans through a ring-fenced set of assets that we have charge over.
The current market conditions may be a challenge for some, especially those that are new to the market and don’t have the relationships and on-ground experience needed in this business. It is great opportunity for someone like us, who come in with a team that has the necessary network and experience. The fact that the flow of credit to one of the largest sectors of the organised economy is constrained is what creates the opportunity to deliver attractive, risk-adjusted returns, in a manner where downside risk is contained since we only lend senior, secured debt to high quality developers against high quality projects.
The consumer technology space in India has seen a lot of investments flowing in. Does Investcorp have any interest in this area?
Kapoor: We have a pedigree when it comes to investing in technology-enabled businesses around the world. We have deployed four tech-focussed funds in the U.S. and Europe. But having said that, we are not necessarily jumping up and down to invest in the technology sector in India, mainly because of what we perceive to be a valuation mismatch. We will wait and see what opportunities come our way and take an opportunistic call.
There are a lot of stressed assets up for sale, especially those belonging to companies faced with insolvency and bankruptcy proceedings. Are you interested in acquiring such assets?
Alardhi: Investing in distressed assets is not in our DNA. We are good at looking at opportunities where we can continue the value creation journey. We are growth investors, as opposed to being turnaround specialists.
How do you view the Indian economy, especially in the wake of the ensuing general elections later this year?
Alardhi: Investcorp is in India for the long term. As an investment firm operating around the world, we have been through all kinds of cycles in all regions of the world. We have done business in the U.S., Europe, the Gulf, and now in Asia. We see India as an economy that is getting to a size of $3 trillion and growing over 6-7%. These are important data points for us. The direction in which the economy is headed is encouraging. While micro data points may change from year to year, we are focussed on investing in good quality businesses, which we can help grow.
Given that the organisation traces its roots back to the GCC, can we expect more cross-border investments flowing between the GCC and India via Investcorp?
Alardhi: Absolutely. A part of the rationale behind entering India and other markets (like China) across Asia is to really respond to the desire and appetite of our investors, which include sovereign wealth funds from the Gulf.
Kapoor: One of the things that we found appealing about IDFC’s business was that the team here has been serving international, blue-chip clients from around the world, as well as domestic institutions and high net-worth individuals (HNIs). This unique and attractive proposition is synergetic with our own DNA. Investcorp also serves top institutional investors around the world including sovereign wealth funds, endowment foundations and blue-chip family offices of merchant families in the Gulf. Through this symbiotic relationship we can serve Indian investors with the full menu of Investcorp’s global products, and not just India-based investments.