Investcorp’s Gaurav Sharma On The Global PE’s India Investment Thesis, ‘Minority Stake’ Strategy, And More

India’s emergence as a fast-growing economy and a vibrant startup ecosystem has caught the attention of global private capital for years. Private equity and venture capital firms from all over the globe have transformed the local investment landscape, collectively investing billions of dollars in Indian companies.

The country is now home to the PE/VC industry’s who’s who, from storied VC players like Tiger Global, SoftBank and Sequoia/Peak XV to prominent PEs such as Warburg Pincus, The Carlyle Group, KKR, Blackstone and CVC Capital. Even during the funding decline, PE-VC deal activities in India touched $39 Bn in 2023, returning to the pre-Covid-19 levels. Its role in Asia-Pacific PE-VC activity is also growing significantly. In 2023, India accounted for nearly 20% of all PE-VC investments in APAC, up from 15% in 2018.

However, there is an interesting twist in the narrative. Now that VC funds have pulled back and a funding winter has ensued, PEs are keen to invest more in startups. According to Tracxn data published in The Hindu, as many as 321 Indian companies have raised PE funding since 2021, and all bypassed venture capital in the process.

That does not mean PE and VC players are at loggerheads. It is more of a symbiotic progression as PEs take over where venture capital stops, says Gaurav Sharma, the India head of Investcorp, a Bahrain-based PE firm with a bullish outlook on India. The country’s huge growth potential did not escape the PE’s notice more than a decade ago, prompting it to identify India as a key investment destination.

Set up in 1982, the PE player has an impressive track record, with AUM (assets under management) worth $52 Bn. It initially focussed on high-profile investments in the US and Europe, backing iconic brands like Gucci and Tiffany. But realising the potential of emerging economies, it tested the waters between 2013 and 2018 with investments in a few Indian companies such as Medi Assist Healthcare, InCred Finance and ASG Eye Hospitals.

In 2019, the firm solidified its commitment and launched its India operations by acquiring IDFC Alternatives’ private equity and real estate investment management businesses. The deal brought together Gaurav Sharma, Varun Laul and Anshuman Goenka, who now lead Investcorp’s India team.

Sharma, head of Investcorp’s India investment business since 2019, brings over 19 years of experience in entrepreneurship, private equity, mergers and acquisitions, corporate finance and investment banking. Laul joined the PE firm in 2020 from Zodius Capital and has similar experience in PE, i-banking, management consulting and consumer marketing. Goenka, who previously headed the PE business at IIFL Wealth & Asset Management and handled $3 Bn in assets, came in as a partner in 2019. He has specialised in investing, i-banking and management consulting for more than 25 years.

“When Investcorp entered India, it was primarily a mid-market buyout player in the US and the EU. But we soon realised that even with minority stakes, we could significantly elevate companies with our global expertise,” said Sharma in a recent interaction with Inc42 as part of our Moneyball Series.

The India team now manages an AUM of around $700 Mn and aims to increase this to $1 Bn by the end of 2024. It has completed 18 investments and made notable exits from ASG Eye Hospitals, Medi Assist Healthcare, Safari Industries, NephroPlus, Bewakoof and others.

The global PE firm is also targeting other Southeast Asian countries. However, India remains one of its core markets, underscoring the country’s importance within Investcorp’s broader Asia strategy.

During his conversation with Inc42, Sharma shared insights into Investcorp’s investment thesis, the burgeoning opportunities for private equity in India, target sectors, emerging trends and more. Here are the edited excerpts from the interview.

Inc42: You have been one of the most active investors in India for some time now. What is your core investment thesis driving the operations here?

Gaurav Sharma: Well, first things first. We focus on the mid-market space and write cheques ranging from $25-30 Mn to $100 Mn. We don’t typically invest in early stage startups. Instead, we are a private equity fund investing in growth-to-late-stage businesses, especially those run by first-generation entrepreneurs.

Our key criteria include the existing cap table, unit economics, path towards profitability, disruption potential, scalability and exit opportunities. Whether it is an offline venture, a traditional business, or a new-age technology company, our investment fundamentals remain the same.

Take Wakefit, for instance, one of our recent investments. Although it is a tech-first company, we invested there due to its omnichannel approach. We believe a brand must reach online and offline consumers to grow sustainably. Another example is Global Dental Services, a chain with more than 500 dental clinics in India, creating a sophisticated dental ecosystem.

Of course, mattress brands or dentistry services are not new here. There might be 1 Lakh+ dental clinics in India, and we have popular brands like Sleepwell and Kurlon. But both are very fragmented, unorganised industries.

The question is: How do you disrupt a space already dominated by traditional players and even build an INR 1K Cr+ business from there? We are looking to invest in companies that can achieve this feat and bring high quality and global standards at low costs.

With our global investment experience, particularly in the mid-markets of the US, the EU and Gulf countries, we bring a wealth of expertise to our portfolio companies. We assist them in overseas expansion, IPO, organic M&A, buyout and CXO-level hiring. This capability is our key differentiator.

We typically take significant minority stakes, usually 20-40%, and aim to exit within four to six years.

Inc42: PE funds usually seek controlling stakes in businesses. Given that, how will you explain your strategy regarding minority stakes?

Gaurav Sharma: Let us look at it from another perspective. In growth investing, our primary focus is backing the founders and the founding team. Even if we hold a minority stake in a company, we don’t consider it a disadvantage as long as we can identify the right founders and the most suitable sectors. Those are the most critical factors; the rest will automatically fall into place.

Our shareholder agreement protects our rights from a governance point of view and ensures that all requisites are in place, akin to what you find in a traditional PE deal. No major decisions within the company can be taken without our consent. Even as minority stakeholders, these rules and regulations, checks and balances allow us to exert significant control over critical decisions and enjoy a level of influence typically associated with majority stake ownership. That’s why we are comfortable with minority holding; it is pretty secure.

But ultimately, our investments hinge on aligning with the founders. This is the most critical part of our underwriting. We align ourselves with the founders’ thought processes and assess how we can best support the company’s growth, regardless of whether our stake is 20% or 40%.

Inc42: Investcorp has been actively investing in India since 2019. How have you evolved over the years?

Gaurav Sharma: In many ways, I would say. We have been fairly active in the mid-market space and it has undergone a big shift. There has been a lot of churn within the ecosystem. Take, for example, the consumer tech bubble of 2021. Many got carried away by looking at the top-line growth but neglected growth essentials like unit economics and profitability.

People have learnt from those past mistakes. Both founders and investors now focus more on unit economics and profitability. Again, the ongoing funding winter across the ecosystem has kept even the best investors on the sidelines, waiting for the right time and deals. It was probably not the best of times for startups. But we also gained valuable lessons as investors. We keep tweaking our investment strategy based on what we have learnt. That’s something we have done very successfully.

When we officially started in 2019, we had a modest corpus and focussed on smaller deals while exploring various themes. This led to investments in startups like Zolostays, NephroPlus, Intergrow Brands, Citykart Retail and Bewakoof. But from 2020-2021, we honed our focus, selected specific investment themes and stopped doing smaller deals. Our assets under management grew to $700 Mn, allowing us to write larger cheques and pursue better opportunities.

Moving forward, we will target companies where we can assess the life cycle of those businesses to identify the optimal entry points. This is one of our biggest strategic shifts in the last three to four years.

We are now more inclined to invest in companies like XpressBees, Wakefit and FreshToHome, which have shown significant scale and established themselves as strong brands. Our recent deals with Wakefit, Global Dental Services, NSEIT, and Canpack reflect our consistent strategy, concentrating on our core sectors and private equity fundamentals. We intend to continue this approach in the foreseeable future.

Inc42: What are the most promising sectors for Investcorp?

Gaurav Sharma: In India, Investcorp has positioned itself as a dynamic investor in mid-market companies, especially within consumption-linked sectors and real estate. As a private equity player, we look at opportunities across a broad spectrum, including healthcare/pharma, software and business services, financial services and the consumer space.

In the past four years, we have backed a wide array of companies, including Wingreens, V-Ensure Pharma, Intergrow Brands, Bewakoof, FreshToHome, Zolo, InCred, Citykart, NephroPlus, Unilog, XpressBees and Safari Industries, among others. This approach indicates our deep dive into both traditional and new-age ventures.

Inc42: Tell us more about the sectors at the forefront of your investment pipeline. 

Gaurav Sharma: Our pipeline shows robust activity in the healthcare/pharma sector, which is our top priority. Software services come second in terms of deal flow.

Within healthcare, we strongly prefer single-speciality providers. For instance, the ASG Eye Hospital, currently India’s second-largest eye-care chain, was our investee company. ASG successfully implemented a domestic expansion strategy during our investment tenure to enter new and underserved Indian markets. This led to a 2.5x rise in ASG units and a tripling of revenues.

We exited ASG in September 2022, selling our stake to General Atlantic and Kedaara Capital. This acquisition will bolster ASG’s presence in Southern India.

However, I won’t be able to pinpoint specific sub-sectors within the core sectors where we invest. PE play is highly granular and opportunistic. It is a micro game, and we meticulously assess every deal/opportunity based on its merit.

Inc42: How do investments impact ownership structures?

Gaurav Sharma: Entrepreneurs’ stakes get diluted when VCs come on board. But when we [PE players] step in, we find that most early investors do not hold a majority stake and are not exit-ready. This allows us to make minority investments in a very interesting, different way. Even when holding non-controlling stakes, we can help businesses scale and grow for good exits without going for buyouts.

Venture capital and private equity investments are fundamentally different. VCs come in earlier, and they are willing to take risks that we are not comfortable with. Their return and investment profiles also differ significantly from ours. For instance, when we invested in Wakefit, it had already hit INR 1K Cr in revenue and operated 60 offline stores. On the other hand, VC firm Peak XV had invested much earlier and was on the cap table before we came in.

Of course, some big VC firms run separate investment vehicles for growth stage companies or large follow-on rounds. An Accel Growth Fund and a Peak XV Growth Fund have also been started. But unlike typical VC activities, these funds have distinct investment styles and leverage different capital pools.

Inc42: Earlier, late stage VCs like Peak XV, SoftBank and Tiger Global invested large amounts in Indian startups. Did that disrupt pure-play PE operations?

Gaurav Sharma: That was a trend some time ago when global VC funds used to write large cheques for growth stage Indian startups. Of late, very few venture capital firms are willing to engage in $100 Mn deals as standalone investors.

If you remember, VC funding went downhill during 2022 and 2023. It was evident globally and within the Indian startup ecosystem, owing to global headwinds, business volatility and hyped valuation games. The funding winter has not completely thawed and VC funds are pulling back in certain sectors.

As for PE investors, especially those focussing on growth-to-late stage investments like us, we have our distinct niche. We have always followed our PE fundamentals and never made any VC-like investment. Our recent $125 Mn buyout of NSEIT (the National Stock Exchange’s digital technology arm) is a prime example. Such deals are beyond the VC scope, but we are comfortable in both scenarios.

Inc42: PEs like L Catterton and Great Hill Partners play a crucial role in startup funding. Will PE-VC operations overlap and target the same startups and LPs?

Gaurav Sharma: The investment landscape in India is vast and varied. All investor classes can coexist here for a long time, leverage opportunities, and see a considerable rise in deals. More importantly, VCs and PEs operate under entirely different dynamics.

VCs have been instrumental in startups’ growth. They are the pioneers who identify innovative concepts, take early risks and fund entrepreneurs to help them reach a certain scale. Many startups might not have gotten off the ground without their early support.

Growth-to-late stage PE funds take over after a company reaches a certain scale. We put systems, processes and management teams in place, fine-tune execution, enhance its operational maturity and prepare it for exit – via IPO, secondary sales, strategic acquisitions and more. From VC to PE, it is a symbiotic progression crucial for sustainable growth and long-term success.

Inc42: What’s your take on the AI-GenAI wave? Will it be long-term and sustainable?

Gaurav Sharma: We have always said we back tech-enabled businesses. Technology is undoubtedly a crucial enabler for us. But that does not mean we only invest in tech-centric companies. We have a more nuanced approach, and our investments depend on the sectors businesses are in and the scale they want to achieve.

A new-age, internet-first company or a tech-led first-generation firm is expected to have a robust technology foundation. And they often incorporate AI/GenAI to enhance their processes and operations. But this cannot be the sole criterion for investment. We do not rule out companies operating in core sectors like manufacturing just because they lack AI integration. Our investment decisions are guided by broader considerations, not just the presence of AI/ML.

Unlike venture capital players, which aim to disrupt entire markets through AI/ML innovations, we must recognise AI/ML as an enduring theme. Given the recent data explosion and how businesses leverage it to their advantage, we cannot ignore the importance of this new technology. We are aware of the latest developments and their implications, but we do not have a specific strategy for AI investments.

Inc42: What are your thoughts on the entrepreneurial landscape in India?

Gaurav Sharma: Indian businesses bring significant value, and I have always been impressed by the high calibre of the entrepreneurs here. The country’s entrepreneurial ecosystem is thriving, as the founders are ambitious and precisely know what they want to achieve. Big investors are attracted by what they see as a vast opportunity. But it is up to us to navigate this landscape carefully to avoid fundamental missteps.

As we know, significant shifts have occurred across the consumer tech sector since 2021. The earlier focus on top-line growth has given way to bottom-line profitability. Investors are wary of backing companies that prioritise growth at any cost and burn cash without a clear path to profitability.

Despite the buzz around new-age technology startups, PE funds view manufacturing as a core investment area. This trend will persist, bolstered by government initiatives that foster job creation and economic growth. As a result, PE investors increasingly support B2B ventures, which were less attractive when the focus was predominantly on B2C models.

Regardless of business models (B2B, B2C) or industry segment (manufacturing, for instance), investing in emerging markets like India requires a highly experienced team on the ground. We will always need a team that has been through numerous market cycles and understands the local ecosystem well.

Inc42: Finally, how will you sum up your India plan?

Gaurav Sharma: Well, India is emerging as one of the fastest-growing major economies. We have done well and we are extremely bullish about the Indian market. We will continue to invest here across the themes that we like.

We would love to ramp up our investments rapidly, but there are practical constraints – we can’t go beyond a certain pace. Our capacity to engage in multiple transactions simultaneously is pretty limited as a PE fund. Consequently, we plan to do three to four deals a year. Our growth will be closely aligned with the market here, and we are keen to leverage the substantial growth opportunity that India provides.

[Edited by Sanghamitra Mandal]

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.