ChrysCapital’s Kshitij Sheth On PE Firm’s $5 Bn India Investment Playbook

In the mid-1980s, the term “private equity” gained recognition in India as financial institutions like ICICI and IFCI provided seed funding to startups in the technology sector.

Over the past two decades, the focus shifted towards growth and late stage deals in established sectors such as healthcare, real estate, BFSI, pharma, and biotech.

With further growth, new-age PE firms entered the ecosystem, concentrating on investments in emerging sectors. Recently, even the first movers in Indian private equity, like ChrysCapital, are exploring new-age startups across diverse sectors.

Established in 1999, ChrysCapital has launched nine India-focussed funds with a total fund corpus of $5 Bn. Over two decades, the firm has generated $6.5 Bn in returns with 80+ exits. Notably, they closed their first five funds within the 10-year scheduled timeframe.

Until 2018, ChrysCapital primarily invested in sectors such as enterprise tech, financial services, healthcare & life sciences, consumer, and manufacturing. Post-2019, their focus shifted to the new economy, leading investments in startups like Awfis Space Solutions, Dream Sports, FirstCry, and Xpressbees.

ChrysCapital’s managing director Kshitij Sheth explained that the new economy includes fintech, SaaS, consumer tech, internet services, coworking, EV, and any sector disrupting traditional business practices. The capital deployment in this segment has increased from 10% in 2017 to 35%-40% in recent years, with exceptional growth in 2021 and 35% in 2022.

Sheth emphasised that for PE or VC investing in India, serious consideration of the new economy is essential. As the industry witnesses more buyouts and sectoral diversification, staying ahead is crucial for being considered the best in the game.

Sheth, who joined ChrysCapital in 2011, experienced the firm’s transition after the founder’s exit in 2012. A partnership team took over, and in 2012, they launched Fund 6 with a $510 Mn corpus.

In 2022, Fund 9 was launched with a $1.3 Bn corpus, indicating the firm’s growth and re-establishment in the industry.

Here are the edited excerpts…

Inc42: ChrysCapital ventured into the Indian market at a time when the majority of private equity funds were focussed on the US and Western European markets for investment opportunities. Tell us about your journey in India so far.

Kshitij Sheth: We’ve always believed very strongly in the India story. So far, we have launched nine funds, and all funds are completely focussed on India. Moreover, all our investments utilise India in some way, shape or form.

In IT services, for example, we may have investments that are headquartered in the US but all the operations would happen in India, and more often than not entrepreneurs in the US are of Indian origin. Similarly, in Pharma, we may have companies that are exporting medicines all over the world, but their manufacturing is happening in India.

Apart from this, for consumers, financial services, the new economy and all other sectors, the majority of the business is in India. So, I think, we are an India-focussed fund, we always have been and will continue to be.

Also, when I joined ChrysCapital 12 years ago, the [Indian PE] industry would have been around $8 Bn to 10 Bn in size. The industry has grown 5-6 times since then. Currently, the industry should be in the $50 Bn range.

Inc42: ChrysCapital has been investing in India for over two decades now. What shifts have you observed in your investment strategy during this period?

Kshitij Sheth: We typically used to invest in more stable businesses where we have an established business model, where growth may be expanding from India to overseas or from one product to a second product and with a high profitability factor in place.

Private equity firms never participated in this whole startup ecosystem rush in India until 2015 or 2016. That’s also when you first saw private equity jump into the startup ecosystem in India in terms of investments.

If I talk about ChrysCapital, we were typically focussing on three sectors until 2012 — financial services (mostly lending); healthcare (mostly Pharma); and IT services.

Almost 80% of our investments were in these three sectors. However, in 2018, we realised that internet penetration is increasing very rapidly as is the use of technology in the country. The whole Jio revolution, growing ease of online payments, increasing smartphone penetration – you had all of those macro factors heading only in one direction.

So, in 2017-2018, we went in and did a lot of work to understand how the new economy works.

Today, our portfolio is a lot more diverse. For example, in Fund 8, a $900 Mn fund, we had almost 25% of the fund invested into the new economy. So, I think there’s a huge shift in that sense.

We used to typically invest with an average ticket size of $30 Mn to $40 Mn. Today, our deal size is more than $100 Mn. About 40% of our funds used to be in listed companies. Fund 6, specifically, has almost 40% of the fund in listed companies and 10% in buyouts. Now, for funds 7, 8 and 9, I think listed companies will be less than 10% of the investments and buyouts would be a good 30-40%. So, a lot of shifts in this strategy as well.

We haven’t changed the core investment philosophy of the firm. With larger funds, larger teams and more capabilities, we’ve diversified our exposure across sectors as well as across investment types.

Inc42: Can you elaborate more on the core pillars of the firm’s investment strategy and key areas where the firm adds value for the startups it invests in?

Kshitij Sheth: Unlike VCs, we have a very different portfolio approach, which includes much more concentrated and longer-term bets. So, we can’t just spray and pray. Given our portfolio approach, the startup ecosystem was a big question mark at that point and after studying this ecosystem for a year or two, we came across a thesis that worked for us.

• Identifying the competitive dynamics: We are not coming in early. We’re not looking for a company that’s doubling every year but a company that is in the top two or top three within a sub-sector.
• Being profitable is non-negotiable: The company should be profitable or at least at a break-even stage. We will not use our capital to back losses. If a company is looking to experiment, we look at the core sector profitability and if the company has profitable products in the basket.
• Aiming to get listed: The startup should have a short or long-term listing plan, and that’s where we see ourselves adding value as a PE firm.

While VCs do a great job of engaging with the startup ecosystem and getting them to think big, I think there’s a gap between scaling and going public, and this is where we could play a key role.

So far, we have taken about 12 companies public in our portfolio. We help companies that have enough scale but are not yet ready to go public, as we understand what the capital markets look for.

Apart from IPO, we also advise companies on potential merger and acquisition possibilities, and taking decisions on whether to build in-house capabilities or acquire them. Also, we help companies with governance frameworks, board composition, internal MIS networks and other things that are required to get the company public.

In terms of the number of investments, we want to do about five deals a year, with a maximum of two deals in the new economy. So, if you think about our $1.3 Bn fund with an average ticket size of $100 Mn, we want to deploy that in about two and a half years across all sectors.

Some sectors may have one large deal with $150 Mn, other sectors may have smaller deals of $50 Mn to 75 Mn each. Given where we are in the economy, we are probably playing the latter more often than the former. However, we want to maintain flexibility in terms of deal size — anywhere from $50 Mn to $200 Mn.

Also, we are not passive investors who will disappear for five years, we are very active and have review meetings once a quarter. During these meetings, we engage with our entrepreneurs.

Inc42: At what stage does ChrysCapital invest in a startup?

Kshitij Sheth: Series D or E is when we generally enter. This may be the end of the hyper-growth phase, but it’s still a phase growing at 30%-50%.

However, to be true, we’ve not found the nomenclature of these series very useful. We think of it as business maturity, and when we invest in Series E startups, we want to believe that the company has reached a certain level of maturity. However, that’s not always the case.

Inc42:  Do you have any plans to invest in emerging sectors such as climate tech, defence tech, dronetech, spacetech, et al?

Kshitij Sheth: We will obviously study these sectors as they mature. The sectors you have mentioned are in their very early stages. So, we will wait for these sectors and companies to mature before we deploy.

However, we do have our tracking funnel and we have been tracking many companies in these sectors since their early days. We have a great VC ecosystem in the country. So, we keep meeting them and stay updated on the companies that they’ve invested in.

In two to three years, it could be the right time but today that might be too early. The kind of sectors that we’re looking at today include edtech, B2B commerce, consumer tech, internet services, clean energy, and EVs.

Inc42: We cannot deny the fact that public markets are sensitive to global economic scenarios and we have seen many companies delaying their IPO plans recently. In such a scenario, how does your strategy change and what measures do you take?

Kshitij Sheth: I’ll give you an example. With one of our portfolio companies – Mankind Pharma, the plan was to go public last year. But there was the Ukraine-Russia war, so it was not the best time to go public.

Although you think a company like Mankind Pharma can go public anytime, we just gave it a little more time and then went public earlier this year, which has been a great success.

I think one of the key strategies that we’ve deployed is that while going public, one needs to make sure that the companies understand investor relations. They have disclosures and quarterly data packs that are understandable by the public universe and have a certain set of conferences to attend every year so that investor queries can be resolved.

Explanations, if there is seasonality in your business, need to be given. A lot of detailing is required before going public. You can’t just wake up in the morning and say let’s go public, it takes at least 18 months of preparation.

Next, you have to hit the market at the right price. One must understand that they have to leave some money on the table and keep the new investors happy. They need to see those returns and make sure your IPO does well.

You will be judged on the IPO, not in one day or one week, but even after 6 weeks, 6 months or one year, and that period should create value and the only thing you can do is to keep a check on where you start.

If you start very high, then you can trip. Don’t start crazy low because that’s like digging your own grave. You should rather start with a slightly lower than fair value so that there is enough money left on the table.

We definitely should have flexibility in our approach as instead of three it may take five years, but these are the calls you have to just keep taking depending on the micros and macros of the environment you are standing in.

Inc42: Do you continue to be part of the company as a mentor once it goes public?

Kshitij Sheth: Once a company goes public, it may face a lot of unforeseen challenges. And we are always there even if we are not on their board directly. But what we do before a company goes public is that we install a great independent board that helps the management through tough times when they go public.

For me, public markets are all about communication and if we communicate the right message at the right time, I don’t think there is any major volatility that will happen to your company. Yes, there can be tough times and tough quarters, but if you’ve pre-communicated that and set expectations right then I think that goes a long way in stabilising volatilities.

Inc42: What are your plans for 2024?

Kshitij Sheth: In 2024, we will continue to explore investments. Right now, we have a rich pipeline. I’ll say this pipeline is looking quite good despite the public markets being a bit expensive at the moment.

We’re quite excited about our pipeline in the new economy, but it’s not as deep as it was a couple of years ago. We are also seeing a lot of sectors where the India growth story is playing out quite well. You are seeing a decent amount of growth in both the top and bottom lines in sectors like healthcare, pharma, financial services, consumer, IT services and SaaS.

There may be a little bit of slowdown in IT services for large caps but the journey to digitisation and cloud has not stopped, so you are seeing many modules come through on that phase as well. This is a good time. We have a fairly robust pipeline right now and we don’t expect to deviate from our investments.

To diversify our business beyond private equity in India, we recently launched a Category III Alternative Investment Fund (AIF) named Clarus, which has raised INR 1,000 Cr+ from HNIs and family offices in India, reaching its initial fundraising target. Clarus follows a sector-agnostic flexi-cap investment strategy. It aims to identify and invest in undiscovered gems across the spectrum of large, mid, and small-cap companies.

In the long term, we may be looking at a crucial change. So far, our LP structure for PE funds is 100% international. We have no domestic capital, something we want to try and correct over time. I think, structurally also, India has created structures to make it a lot easier to get domestic capital now. So, while we don’t make any announcements or anything right now, we will be seriously considering domestic capital in our next fund.

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