The G9 has worked with NRIs for many years but despite the obvious attractions of the booming Indian economy and the opportunities presented to global investors, inward investment into India by G9 families has remained somewhat limited.
Our approach to resolve this conundrum has been to identify credible Partners who can help investors to navigate the process of investing into India; with relevant expertise, track record and of course a deep understanding of the needs of G9 families.
G9HEP is a private equity firm based in India focussed on doing direct deals in partnership with family offices in India and globally. Digital (Innovation) and Sustainable (Impact) form the core of the investment philosophy for G9HEP. Findings in the recent Global Family Office Report 2018 prepared by UBS and Campden Research support Hansa’s investment approach.
Private equity now accounts for 22% of average family office portfolio globally and returns in 2017 were 18%
Over 50% of the family offices indicated that they would like to invest in direct private equity deals in the coming 12 months
Asia-Pacific reported the highest average return of 16.4% among all geographies globally
A third of family offices are now engaged in impact investing – with the most common vehicle for investing being via private equity
PRIVATE EQUITY IN INDIA
Private Equity in India started in early 2000s and is gradually maturing. While the returns in 2005-2008 have been above 25% they dropped to 10% by 2014. As per the Mckinsey report titled Indian Private Equity: Route to Resurgence, June 2015, reasons for lower returns included a weakening of currency, high valuations, inexperienced managers, and lack of maturity of the growth capital model.
Regional focus – to source deals at attractive valuations
Based on the lessons learnt over the last 18 years with private equity in India, G9HEP has adopted a differentiated approach and set-up. Most of the private equity firms in India are based in Mumbai whereas Hansa is based in a city called Hyderabad. The team has an extensive network in the focus region which enables it to source proprietary deals at attractive valuations. The region of focus includes the states of Telangana and Andhra Pradesh which represent a GDP of $266 billion (10% of India’s GDP of $2.6 trillion) and a population of 85 million. In the ease of doing business rankings in India, these two states are at the top.
G9HEP Team – experienced managers
G90HEP focuses on growth capital deals and buyouts. Investment focus is based on the skill set of the two founders. Together they have 26 years of experience with investments (13 years in private equity and 13 years with investment advisory). The team has deployed capital or managed investments worth $250 million in their careers.
Buyout focus – to address the gaps in the growth capital approach
Consistent real returns in private equity are driven by sustainable operational improvements. The G9HEP team has 13 years of full life-cycle experience with buyouts (deals-portfolio management-exits). The team thinks and acts like business owners and applies a very differentiated approach to transforming businesses – G9HEP Transformation Framework. This framework helps in converting the long-term vision of a company’s management into clear actionable steps. Key elements of this framework are ambition, strategy (where to play / how to win), governance (risk, capital allocation), team (culture) and execution. The whole focus of transforming businesses is to ensure tangible improvements to end customers in cost, quality, delivery, and innovation.
There are two routes for family offices to invest in private equity – investing in funds and making direct investments. 7.6% of family offices have invested in private equity funds and 14% have made direct investments. There are pros and cons of both approaches but in the recent years the share of direct deals has been increasing. Several single family offices in India have set up internal investment teams to make direct investments into early stage companies.
Influence and costs
The advantages of direct deals are in having a greater influence on choosing the investments and ability to play a more active role in the development of companies. Direct investments also help in reducing the management fee of 2% associated with fund commitments. Typical commitment period to private equity funds in 10-12 years where as direct investments tend to have a shorter holding period.
Currently the first deal is being executed in partnership with a family office in India. The target company is in the engineering services – it specialised in managing complex spatial data (data of land and buildings). Spatial data domain is being disrupted by technologies like BIM (Building Information Modelling) and drones resulting in a fast-growing market based on innovative products and services. The company has a 14 years’ experience in managing complex spatial data and is able to use that experience to benefit from new digital technologies.
A four-year transformation plan has been developed by the management team with an ambition of growing sales by twenty times in four years. Several changes have already been implemented to facilitate growth – strengthening of the sales organisation, simplification of the legal structure, aligning the financial systems to the new growth strategy, and monthly corporate governance. Exit would be in the form of listing the company in the SME (small and medium enterprise) exchange or investment by a growth capital firm. G9HEP would be on the Board of the company driving the transformation plan until exit.
Ethos of G9HEP is ‘Creating alpha returns for investors by adhering to good values’. Alpha returns are returns above what the benchmark index (BSE SENSEX) can generate. Values include our personal values and our focus on ESG (Environmental, Social and Governance). Having worked in the Nordics for over a decade the G9HEP team has hands-on experience with global best practices in sustainability.
ESG as risk
ESG is embedded into all aspects of the investment approach. A good ESG approach reduces the risks associated with businesses and thereby ensure better returns. While sourcing deals, sectors with high ESG risks are avoided – tobacco, alcohol, real estate, infrastructure, and telecom. Due diligence focuses on employee satisfaction, HR policies, and existing business owner’s integrity and background. While managing companies, corporate governance is implemented which includes monthly financial control, ensuring tracking of key ESG parameters like employment, emissions.
We measure impact based on the 17 UN Sustainability Development Goals (SGDs). Innovation is also one of the 17 SDGs. Digital driven innovation is one of the key drivers of growth in our investments. Hansa is not an early-stage investor but invests in established business that can grow rapidly by using new technologies. This approach reduces the risk associated with the 95% failure rate in early stage investments but benefits from the upside created by new technologies. This approach also ensures attractive entry valuations which are key to driving returns.
G9HEP’s INVESTMENT STRATEGY
Small and mid-market buyouts or growth capital deals in India
Direct deals in partnerships with family offices and institutions
Target sectors – consumer, business services, manufacturing
Deal size is $3m - $10m
Holding period of 3-4 years
Growth hypothesis – growth in EBITDA by 3x-5x
Exit the company to realise returns