Almost a decade ago, HDFC chairman Deepak Parekh's son Aditya Parekh and his friend Sameer Shroff, both in their 30s, left their investment banking jobs at Wall Street to start a business in India. In 2009, they raised Rs 800 crore from local rich businessmen and started Faering Capital, a private equity fund to invest in growth companies with a five year horizon to exit. After investing 90% of the funds in 14 companies in the past five years, Faering Cap is once again in a fund raising mode to raise Rs 1,800 crore. ‘Our goal is by the end of this year or by March, we would have returned 50% of our capital raised in the first fund, which is unprecedented," they said in an exclusive interview to ET.
How did Faering Capital start its journey?
Aditya Parekh: We both met in the US. We were both starting out our careers, he was in Morgan Stanley and I was in Meryl Lynch. We met by accident at a friend’s house but hit it off, two people in financial services, with same goal, living in New York, we both wanted to come back to India and build a business one day and we remained close ever sense. Our journeys have been fairly parallel, we both went to business schools abroad, he went to Kellog, I went to Wharton and started making our way back. I came back in 06-07, he came back a year later and that’s the genesis of Fairing Capital.
In 2009 we formed Faering Capital and what we have been able to create a differentiated platform and it been a partnership of values and trust that we have been able to create. Our goals when we started, in Taj, with a piece of paper and a pad, we asked what do we want to do? And we wanted to create a differentiated asset management platform in India.
Tell us about your investments and portfolio?
Sameer Shroff: Our strategy was we will not do an investment, unless someone in our ecosystem, vouches for the entrepreneur, because the shareholder’s document can only protect you so much. We had seen in 2006 and 2007 large global funds coming to India and doing deals based on consulting reports where they did not know the promoters. We thought the best way to protect ourselves is to only invest in companies where some in our ecosystem knows them very well. Second, we said we need to be deep sector experts and that was driven by our view that India in the next 10 years is going through some very large structural changes.
What were the themes of your investments?
Samer Shroff: One is urbanization and increase in professional workforce. These are causing a ripple impact in 3 or 4 sectors which we identified and said we will have the deepest expertise and networks in those sectors. So financial services has been our number one most important sector, where we have the deepest network and the second one is consumer.
We are obsessed by brands. In a long time cycle, it is the brand that protects you. Whenever given a choice of investing in input to a brand or brand itself, we always invest in the brand. So between products and services, brands are what hold you.
As a PE what is your view for a decade?
Sameer Shroff: We believe that in the next 5-10 years, be it in services sectors, banks, product sector-apparel, healthcare sector-hospitals, people who have been able to build long term brands always create value. So other than financial sector and consumer, healthcare is another sector where we have spent a lot of time. Healthcare is counter-cylical, if you provide a consistent service. Other than that we remain opportunistic about the sectors but they are all enablers of consumption if not consumption directly.
Which sectors did you stay away from?
Aditya Parekh: What we have chosen not to do is that we will not invest in any company that is just an exporter to the world. Or a back office to the world, we do not want to be just a commoditized input to a company, because it is well in a good cycle but gets crushed in a down cycle.
Does your portfolio reflect this strategy?
Aditya Parekh: Our portfolio reflects this hypoythesis. Today, out of 14 investments that we have done so far, 8 investments are between financial services and consumers. Once you start showing interest in that portfolio, it starts to get you more and more deal flow in that sector.
But, you have a smaller fund?
Sameer Shroff: It does not matter how much money you have raised, it matters what you have done in your portfolio. Today it is much harder to convince your entrepreneur why he should take your money if you do not have a portfolio to back it. Lot of people have larger funds but when they sit with the entrepreneur they cannot say how they will add value to the company.
For instance in financial services, we have invested across the spectrum- from banks, NBFCs, payments companies, which are very exciting, in an online financial services player so we have covered the entire spectrum. Ours first and largest was Ratnakar Bank, which is now going to do an IPO. We are one of the top 5 largest shareholders in the bank. Ratnakar Bank was going through a transition, and we were first shareholders to back it and invested in the first rights issue. Then we invested in subsequent round so that we amassed over a 4% stake.
In the financial services space, we invested in another bank, Citi Union bank and we have a payments company TranServe. This currently has both a pre-paid program card manager and a digital wallet business. So we have a lot of inbound interest in this company.
What about your consumer?
Sameer Shroff: In Consumer, we have two of the best brands in India. One is Enamour-leading lingerie brand in India which has done well. It has done fantastically well, when we invested in it was around when we invested in it was around 60 crores and now we are on track in FY16 we should hit over 160 crores in revenues.
Exits is a problem for many PE funds. What is your view?
Aditya Parekh: We have seen may PEs say there is an exit problem. We don’t believe that, we think it is just a problem of bad portfolio. If you have a good portfolio, you should always be able to sell. We have seen funds raised in 06 -07 and they have still not exited. We do not have an exit problem, you have to choose your portfolio in a particular manner so our first investment Ratnakar Bank, we knew it will list. Other PE funds invested everything upfront in 2 years, we said let’s not time the market, lets invest patiently, so we have taken full 4 years to deploy this capital. There will always be ups and downs but do not try to time the market. If you have invested in a good brand it holds you during bad times.
Have you invested everything from the first fund?
Sameer Shroff: We have mostly invested, kept some for follow-ons. There is one small thing we are working on that we may do but otherwise, our most recent deal was announced last week-Funds India.com, which is an online financial services company. We believe that is a huge opportunity where we can reach customers directly, especially in smaller towns in India.
Aditya Parekh: When you give same weightage to each transaction, whether it is Rs5 crore or Rs100 crores, and you are thinking about it the portfolio as a team, from a portfolio level and you do not want any stepchildren. Each investment is doing well. And that is where we can say there is no exit problem.
What is the exit time frame?
Sameer Shroff: Typically each investment we want to hold it for 4-5 years. So December, 2011 what we invested in we will exit in 2014. So we have lot of inbound interest in some of our investments which we will look to exit, at least partially monetize it. Our goal is by the end of this year or by March, we would have returned 50% of our capital raised, which is unprecedented. We would have returned Rs 400 crores of capital and we on target for it.
When you chose your portfolio, what were you looking for? Safety? Or let me take a risk?
Sameer Shroff: We are not venture capitalists, we do not have the philosophy that out of 11 investments if 2 do 100 x and rest fail we will feel as bad if 2 children become Olympians and the rest die. You won’t feel happy. Our policy is capital protection is very important to us. We raise capital from people we know, put our lives savings in it as well. What we looked for was 1) Is this a promoter we can trust? 2) Has the corporate governance been verified by people close to us? 3)Is he building a market leading company in this industry? 4) Is it a strong brand?
Sectors like healthcare, consumer and financial services can’t go wrong in India?
Aditya Parekh: Even within these sectors, there are 100 ways of losing money. Unless you have ability to say, I am investing in a place I can trust, and can work with them. And so it’s not how quickly I can get deal done, it’s about history of the deal.
IS it a conscious decision to stay away from ecommerce firms, real estate and infrastructure companies?
Aditya Parekh: Online financial services, is a huge opportunity. It leverages our DNA and expertise. We are looking at consumer brands that were built using digital channels. The economics must make sense. We won’t do real estate, infrastructure and not input companies to large exporters or large industries. But other than that we have large canvas if it meets our filter of high corporate governance, investor relations and opportunity to exit in next 4-5 years. Just because a sector is hot, we will not invest in it. It has to make sense and there has to be a path towards making money.
