Private equity pasha - Ashish Dhawan

It’s a Monday afternoon, and at Chryscapital’s Headquarters in central Delhi (actually a first-floor suite in the Oberoi Hotel), there are eight men seated around a large oval table in the conference room, taking stock of the firm’s portfolio companies and discussing possible investment opportunities. It’s a weekly ritual they’ve been following for years, but of late, the mood around the table at such review meetings has tended to be sombre. The principal source of that sentiment is a tall, lanky and bespectacled man, who (along with a Harvard buddy) launched ChrysCapital eight years ago.

Ashish Dhawan, 38, the man in question and the one who can justifiably take credit for turning the global private equity investors’ attention to India, doesn’t quite like what he sees going on around him in the industry. Stock valuations, as measured by the bellwether 30-share index Sensex, are at record highs; the Sensex stocks, for example, are trading at an average earnings multiple of 26; there are just too many funds in the market (at last count, their number was put at 450-odd); worse, it’s not just valuations, but in many sectors the business cycle seems to be turning down.

“There’s just too much money sloshing around at present, and we feel that the extraordinary times we’ve seen over the past five years (in terms of returns) may not continue too far into the future,” says Dhawan. It’s not the best thing to be saying when you’ve just finished raising, like ChrysCapital has, $1.25 billion (Rs 5,000 crore) in funds from foreign investors. But, then, that is classic Dhawan strategy: Under promise and over perform. Over the last eight years since he opened shop as a near one-man outfit in an industry dominated by institutional players, Dhawan has raised $2.5 billion (Rs 10,000 crore) in five rounds on the promise that a) India as a market can generate better returns, and b) ChrysCapital is a better investor than a lot of its competitors. So far, he’s been right on both the counts. Like Dhawan points out, India has been on a roll since 2003 and the kind of returns equity has provided is unprecedented.

And although ChrysCapital operates in the ‘private’ equity arena compared to ‘public’ equity that is the stock market, the general economic boom plus some smart deal making have meant that ChrysCapital’s investors (called limited partners or LPs in the industry lingo) have been handsomely rewarded. The firm, Dhawan claims, has generated an aggregate (that is, all funds put together) internal rate of return (IRR) of 60 per cent, which is impressive by any measure.

For more than six months now, though, Dhawan has been working to moderate the expectations of his LPs. He has told them they should only expect returns between 20 and 25 per cent. “Our investors are fairly patient, and we are in no hurry to invest Fund V (the latest fund),” says Dhawan, adding that less than 10 per cent of Fund V has been invested so far. Adds George McCown, Dhawan’s one-time employer and an investor in his funds: “He’s very cautious in terms of valuations, and if he has turned some more cautious in this market we have no issues with that. His investors have a lot of confidence in him.”

A man to watch

So, in an industry cluttered with 450-odd funds, why is Dhawan a man to watch? Simply because when it comes to India-focussed entrepreneurial funds (versus, say, a larger Indian institutional fund such as ICICI Venture or global private equity giants such as Blackstone or Carlyle), there are few that can match ChrysCap’s enviable position in the industry.

Peers to watch Name: Sumeet Narang Founding Managing Director, Samara Capital Reason: The newest kid on the PE block, Narang, like Ashish Dhawan, is a Harvard Business School alumnus and a former Citigroup honcho. He quit Goldman Sachs last year to set up his own PE firm, and will be closing his first fund of $200-250 million shortly. He is already getting billed as the next Ashish Dhawan! Name: Rahul Bhasin Managing Director, Baring Private Equity Partners India Reason: A veteran of the Indian private equity industry, Rahul Bhasin is seen as a bit of a maverick for two reasons: One, he tends to do earlier stage transactions compared to someone like Ashish Dhawan, and likes to get involved in the running of his portfolio companies. Bhasin is said to be raising his third fund of $450 million. He doesn’t have the fund-raising clout of Dhawan, but is perhaps smarter at investing.

Few entrepreneurial PEs can raise funds like Dhawan can. For instance, Dhawan says, ChrysCapital’s Fund V was raised in a record time of three months from first meeting with LPs to closing, and apparently it was oversubscribed three times, although the firm chose not to accept more money.

Among his peers, Rahul Bhasin of Baring Private Equity Partners India (BPEPI) is said to be raising his third fund of about $450 million or Rs 1,800 crore (his previous two funds were relatively small at $40 million or Rs 160 crore and $175 million or Rs 700 crore), while the newest kid on the block and a Harvard alumnus like Dhawan, 31-year-old Sumeet Narang of Samara Capital, has raised $250 million or Rs 1,000 crore as his first fund (see Peers to Watch).

However, neither can claim to have wrapped up their fund raising as quickly. “In terms of having a premier position (among entrepreneurial PEs), ChrysCapital is nonpareil,” says Ajay Relan, Managing Director, Citigroup Venture Capital International, who, in sharp contrast to Dhawan’s wariness, has invested $1 billion (Rs 4,000 crore) in about a dozen deals in 2007 alone.

Typically, when PE firms raise money, they tend to raise double the money in the previous round. By that logic, Dhawan’s next fund—it may not be raised for another three years—could well be around $2.5 billion. (Fund managers get a 2 per cent management fee, besides a 20 per cent bonus subject to certain performance benchmarks; therefore, for its Fund V, ChrysCapital must have got Rs 100 crore as fee alone.) Yet, Dhawan says he’s not chasing size. “We are not in the asset game. We want to grow in a limited way, but outperform the others. It’s what you could call controlled ambition,” says Dhawan.

The snapshot Since 1999, Chryscapital has made more than 45 investments worth (at investment cost) about $1 billion. The investments have included initial dotcom disasters like Avigna and Cheeco, but since have steadily improved. In fact, ChrysCapital has had no lemons in Fund 2 through 4. Says Kunal Shroff, Managing Director, ChrysCapital: “Starting Fund 2, we decided to focus broadly on six sectors and said let’s get smart about these sectors.” The six sectors comprise business services, consumer goods and services, financial services, healthcare and pharmaceuticals, infrastructure, and manufacturing. ChrysCapital was among the first PE firms to invest in a construction company (IVRCL), financial services (Shriram Group), and also buy stocks from the secondary market. It also bet on wind energy company Suzlon close on the heels of Citi Venture Capital buying a stake in it. While ChrysCapital claims to do a lot of value add at its investee companies, the fact is it may be more hands off than some other PE firms. Just the same, “we quite like them, they have a great deal of domain knowledge,” says P.J. Nayak, Chairman & CEO of Axis Bank (formerly UTI Bank). Adds R. Thyagarajan, Chairman, Shriram Group: “Their coming on board did not make much difference to our way of working, but it did make the group more confident of itself.”

Just the same, more funds under management has its benefits. “Now, we can do a Warburg-Bhartilike deal,” says Brahmal Vasudevan, Managing Director, ChrysCapital, referring to Warburg’s $300-million investment in Bharti Airtel between 1999 and 2001. In fact, ChrysCapital is said to be looking at a $100 million (Rs 400 crore)-plus deal, although when asked Dhawan says chances of it happening are slim.

But you get the point: With more money, and greater operating freedom and focus relative to his competitors (a Warburg may have deep pockets but its decision making chain goes back to the US; a Samara or BPEPI may have as much of India focus, but their pockets are smaller), ChrysCapital is ideally placed to lead the explosive growth in the private equity industry. (In 2001-02, PE investments were around $500 million; in 2007-08 the number could hit $13 billion or Rs 52,000 crore.)

Flexible does itControlling one’s ambition, as Dhawan puts it, is a smart strategy, too. That’s how, by and large, the PE game is played. Besides, in a business where a fund manager is only as good as what his last fund returned investors, ChrysCapital’s enviable reputation among LPs is simply due to its performance track record.

And if the firm has done better than its competitors relative to the size of its funds, it’s because it hasn’t hesitated to change with the times. For instance, like most firms of its vintage, ChrysCapital was founded as a Silicon Valley-style venture capital firm that pretty much aped its American counterparts, investing in fancy dotcoms.

However, when it became apparent that dotcom funding was a path to perdition, ChrysCapital quickly moved to doing things that would generate returns.

Thus came a flurry of investments in a wide variety of industries ranging from IT (MphasiS) to financial services (YES Bank) to construction (IVRCL). In contrast, firms of similar vintage such as WestBridge Capital Partners stayed with their venture investing philosophy, funding a lot of early stage technology companies, instead of growth investing that ChrysCapital had started doing. In mid-2006, WestBridge merged with Valley-based Sequoia Capital to form Sequoia Capital India. “I think they realised that they had stuck to their knitting (of venture investing) a little too long and thought it better to get into bed with Sequoia,” says a PE investor who did not want to be named.

Yet others, like BPEP India, did do some novel deals (it was the first to do a buyout, when it purchased BFL Software and merged it with Jerry Rao’s MphasiS; it made a killing on the deal when it sold it to EDS last year), but where it differs from ChrysCapital is that it likes to invest in companies where its fund managers can add significant value by way of helping run them. Dhawan and his team, in contrast, are more hands off and have no ambitions of actively helping companies as long as they think the management knows what it is doing. Says R. Sridhar, Managing Director, Shriram Transport Finance Company, part of the Shriram Group where ChrysCapital has significant investments: “Ashish Dhawan is a passive investor, he doesn’t interfere with management.”

Given India’s humongous appetite for capital— just about every industry needs to expand—there will be more private equity money that pours into the country. Some day, the investing market may get as competitive as the one in the US, but ChrysCapital’s investors are betting on the fact that Dhawan (and their money) would still have a significant place in the market.