Newbie Fund Ananta Capital Bets On Fresh Structure

Ananta Capital--started by three partners Vikram Kuriyan, NV Ramanan and Jaganath Swamy in September 2009--has launched a private equity fund targeting a size of $100 million betting on investments in the advanced materials space. The firm is also conceptualizing a public equity fund which will be launched in the fourth quarter of 2011. Jaganath Swamy, whose career spans stints at Evalueserve Inc, McKinsey and Company and Hg Capital, holds a B.Tech degree from the Indian Institute of Technology Delhi and an MBA from The Wharton School. In an interview to VCCircle, Jaganath Swamy talks about the fund-raising activity and investment strategies of Ananta Capital. Excerpts:

What are the contours of the proposed fund?

We have launched our first fund, the India Pledge Fund (IPF), with a target of raising $100 million. IPF is the first fund of its kind in India and is structured as a hybrid pledge fund (a model which is becoming dominant with new funds in the US such as Flexis Capital – raised by Louis Freidman, ex Bear Stearns M&A chief). The IPF was started in response to the growing unhappiness in LPs about the way capital has been managed so far in the private equity space, including the opacity and general lack of control on the investments the fund makes.

The IPF operates with a twist on the traditional committed capital and “blind pool” structure of typical PE funds, and thus provides LPs with better investment economics and deal transparency than most funds. While a minimal portion of management fees are charged on “pledged capital”, a significant portion of management fees are charged based on invested capital (rather than on committed capital), leading to significantly better economics for LPs. Also, the average deal turnaround times are also shortened since there is a ready deal pipeline for capital investments which leads to better capital utilization from a fund perspective.

How are LPs responding to your fundraising?

LPs are currently quite cautious on fund raising but have been very positive towards innovative structures like ours. We have got strong feedback from LPs on the attractiveness of our concept (both from an economics and a transparency perspective). As a new fund manager, we spend a significant portion of our time with family offices, high net worth investors and selective institutional investors, explaining the concept of our fund, talking through the dynamics of the sectors we are looking to invest in and laying out our investment philosophy.

Since our target sectors are niche, we make the effort to explain the growth potential in the industry to our LPs so that they can see for themselves the availability of deals with super normal return potential. LPs have really appreciated our targeted and differentiated approach and we hope to do a first close of our fund at $50 million by November-December of this year with a planned final close by mid-2011.

How is your fund-raising structure more LP-friendly?

LPs receive full transparency on the deal pipeline, get complete visibility on deal rationale, value creation strategy and on capital deployment hence gaining significant ability to track the investments where their capital is invested. Our aim was to create a JV style of investing (between LPs, us and our investee companies) where the investing goals of the LPs are aligned to the fund management team and there is significant accountability for the fund/operational management team while retaining enough fund manager discretion (which does not exist in a standard deal by deal structure).

Are you seeking participation from domestic investors?

We have now also launched a focused approach to fund raising from domestic investors (DIIs, family offices and HNIs) and are talking to several fund raising partners to give us visibility to domestic investors. Given our deep Indian operating and investing roots, the domestic market is a natural fit for fund raising for us. We have seen domestic investors become as savvy as global investors and are very much prepared to allocate capital to innovative structures.

What about your next fund focused on public equity?

We are also in the process of conceptualizing a PIPE-only fund, the India Equity Fund (IEF), with a target of $50 million which will however not be launched before Q4 of 2011. As a cross between an activist hedge fund and a concentrated public equity fund, the IEF will look to apply a private equity approach to public equities investing. We are currently working on building a proprietary Quantitative Strategies model for shortlisting stocks and will start working on fund raising only in late 2011 after the final close of the India Pledge Fund.

What are the investment themes you are chasing?

The India Pledge Fund has a pureplay focus on two key sectors - Advanced and Specialty Materials: e.g. Composites including fibre reinforced plastic (FRP), engineering plastics and polymers, specialty resins and chemicals, performance materials such as solar films and renewable energy: solar, wind, bio-fuels and small-hydro.

Who would qualify as potential target companies?

We look for small and medium sized profitable companies with at least five years of operational history for most targets where there is some fundamental manufacturing or technology differentiation. We do not invest in projects but rather invest in manufacturing or technology-driven companies that either have a strong market position or the ability to create paradigm shifts in technology.

For example, in renewable energy, we do not look at a single solar PV power plant project but rather focus on solar PV module manufacturers, bio mass technology companies or renewable energy aggregators. The typical sales for our target companies would be in the range of Rs 35 crore to Rs 350 crore with a strong earnings profile (at least average EBITDA margins of >10-15%) and strong revenue growth potential (set to grow at a minimum of 2-3X of GDP). Our sweet spot is to deploy equity checks of $10-20 million per deal with supernormal return expectations of at least >30-35% gross IRR in base case.

What is the rationale behind selecting these areas-advanced material and renewable energy?

The advanced/specialty materials domain is a niche and exclusive sector in India. With growing infrastructure spend in India and rapid development of technology, this space is set to grow at upwards of 2.5-3X of GDP and 2X of Industrial Production growth rates. This theme has dominant end-user applications in key growth sectors such as auto components, railways and metros, industrial tanks and pipelines, construction, electronics and wind and solar energy. Advanced/Specialty Materials currently comprises a $6-8-billion market in India growing at rates of over 15-20%. Take composites, for example. Wind mill blades are made of 100% FRP. Metro coaches (such used in the Delhi Metro) are made of 95% composites.

Auto components such as truck bodies, hybrid car bodies, brake linings and bumpers are increasingly made of fibre glass. Penetration of FRP in chemical tanks and petroleum pipelines is rapidly growing. As fundamental infrastructure spend in these core sectors grows, value will percolate to composite and resin manufacturers across the value chain. Similarly, the story on Renewable Energy in India has been well documented. We feel there is tremendous scope for growth in this sector which will throw up some interesting deals in the next 2-3 years.

Are there good quality companies available in renewable energy and material sectors?

We are seeing over 100-150 small and medium sized companies in these sectors with excellent business models, market positions and technology ownership which are struggling to grow due to lack of capital or global access. For example, we have seen some specialty chemicals companies which took a hit during the current recession due to heavy capex investments made during 2005-2007 but where the fundamental business model is intact and can easily be leveraged for EBITDA growth. All these companies are now raring to go through capacity utilization and product mix changes and are looking for partners like us who understand the business. We are seeing several great deals at very attractive valuations waiting to be done.

What are the advantages you see in acquiring a significant minority stake or a buyout?

We are strategic and operational investors rather than financial investors. Given our deep operational expertise (NV Ramanan – one of our Managing Partners has over 26 years of global operating and investing experience across companies like DSM, Honeywell and the Tata Group), our aim is to create long term strategic and operational value by becoming closely involved with running portfolio companies while providing access to capital. Having a strategy to acquire significant stakes (between 25% and 85%) in investee companies was intrinsic to that approach. We have a unique model of working alongside entrepreneurs in an embedded fashion – through board-level management as well as deploying highly qualified professionals who can transform portfolio companies with international best practices.

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