We want to back entrepreneurs who value equity: Prashasta Seth of IIFL AMC

An eye on profitability and a clear business model are top priorities for IIFL India Private Equity Fund, which has invested in three companies already from its 950 crore fund. Investing in the broad buckets of consumer brands, healthcare, financial services and technology, the fund recently announced its investment in Neewee Analytics which serves the manufacturing sector. It has also backed housing finance company Kadaieshwar Homefin and eye care chain Infigo Lifesciences Pvt. Ltd.

In an interview with TechCircle, Prashasta Seth, chief executive officer of IIFL Asset Management Ltd talks about the scope of the investment vehicle floated by IIFL AMC and the portfolio companies. Edited excerpts:

What are the key sectors of investment for IIFL India Private Equity Fund? Which specific areas are you looking at?

There are broadly four sectors we are looking at -- consumer, technology, healthcare and financial services. We believe there are strong tailwinds in each of these sectors and we plan to find 15 companies to invest in from the fund.

In case of financial services, we will see more use of data than ever in the past. Credit as a percentage of gross domestic product will grow. We are in conversation with a consumer lending company and a retail insurance technology company. We believe that under-writing a consumer loan requires less of physical overlay, is easier to scale and not served adequately by existing players.

For consumer brands, we are looking at businesses which are targeting specific niches and can become sustainable. Branding strategy is less expensive now as compared to the past due to digital channels. Also, not all brands need to build a distribution channel and can start with online sales initially.

Healthcare is an unorganised market and there are no specialty chains which have emerged pan-India. This is a segment we are looking at for the next 5-10 years. We will also see a lot more interplay of technology and biosciences. It is difficult to scout these investments.

For the technology bucket, artificial intelligence is changing things tremendously and has multiple applications. We are looking at companies which are targeting specific niches.

These are long term trends and will play out in the next decade.

What do you look for when you make an investment?

We look at companies where the business model is established and there is a clear path to profitability. We usually invest in a company when they need around Rs 50-75 crore to grow the business, scale up faster or launch a product. The conscious effort is to come in at a time when the capital deployed makes a difference to the company. Also, we are looking at double-digit stakes in the company we are investing in, to be able to exercise a reasonable amount of influence. We are neither a passive investor nor will we tell a company how to run their business.

Startup promoters are opting for differential voting rights to give them better control over their business’ operations even after multiple funding rounds. Your thoughts on the issue.

There could be one or two capital intensive companies where DVR is needed but I am not comfortable with the idea as an investor. I would like to invest in entrepreneurs who value equity and are wary of diluting it. DVR sometimes becomes a mechanism for companies to burn more and keep raising more funds. In our portfolio companies, we ensure breakeven. Even though the next round of capital is delayed, we have enough cushion in the bank to pull them through that.

It is also a factor of market euphoria when money is easily available.

Is the fund keen on backing first-time entrepreneurs or would you select an experienced core team?

We have backed people who are on their first startup and we have had people who have been in the business for 15-20 years. We want founders who fit in with our investment thesis. We are not particular about experience. That is a bet we are willing to take.

What is your exit strategy from the first fund, IIFL Seed Ventures Fund 1? Will any of the companies you have backed go for an initial public offering?

We have backed 14 companies from the first fund which we started deploying by the end of 2015. We should be announcing the first exit from it in a few months, almost a year earlier than expected. Over the next year and half, you will see us exiting a few more companies where we hold higher stakes. We will participate in a bit of secondary sale and it depends on the comfort of the company.

Most of the companies are far from IPO. For us, it will mostly be an exit to a strategic investor or an acquisition by private equity firms. In India, IPO markets were open briefly between 2016 and 2017, though today it is tough. The private market is significantly better in terms of an exit.