The unconventional VC investor | Carpediem Capital Partners
The unconventional VC investor | Carpediem Capital Partners
The typical way of thinking about a venture capitalist is that he is looking for companies that will give him a 10x return.
A common mantra in the VC world is - go big or go home. There is rarely space for stable profitable businesses growing at 30-35% in the typical VC world.
This is why this episode is a myth buster and a must-listen for founders who are seeking to build sustainable long-term businesses.
Abhishek Sharma watched 'Pretty Woman', the iconic American classic and got intrigued by Richard Gere's character, a private equity guy. This sparked Abhishek's desire to become a VC, and the rest is history.
Abhishek talks about his contrarian approach towards investing and his investment thesis built on India’s consumption story.
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Additional readings:-
1.’Great time to create long term portfolio’
2.Indian mid-market PE firm Carpediem Capital looks to close Fund II by next month
Read the text version of the episode below:-
Abhishek Sharman: hi guys, this is Abhishek Sharman. I'm the founder and managing director of a private equity firm called Carpediem Capital Partners.
We are a consumer and services-oriented fund, invest in sustainable businesses, which are either trying to create a consumer brand or trying to create an organized service. I started in 2005 in a fund called Sun Capital Partners. Then I went to India Equity Partners. And then finally at end of 2013, I quit. And along with two other partners I set up Carpediem . We've been operational since 2015 and that's what I got to do currently.
Akshay Datt: Tell me about the kind of skillsets which you need to develop in private equity. You spent your whole career there when you joined, you obviously, must have been asked to do less as any fresher would be. So what were the kind of skill sets that you developed, which you feel people should develop to build a career in this space?
Abhishek Sharman: Private equity requires a certain amount of maturity.
So I think while, some maturity happens with evolution, as we all evolve, but even within the peer set, I think some people are more mature than others. I think private equity is certainly, something that requires that, because it's a business, it's in some ways a strange kind of business because you are dealing with a lot of other people.
You're managing other people's money, which you're betting on certain other people. So, karma is not really in your hands. It's in the hands of many other people who decide to do what they wanna do. And at the best of times, things are not in your control, so you have to build businesses rigorously you have to have a strong sense of fiduciary responsibility towards other people's money because that's what they're looking at.
So it is a balancing act between, a very sophisticated set of individuals or institutions who are large enough to be able to write big cheques and betting in entrepreneurs who you think have the future potential of becoming big and therefore you have to be able to manage the tool.
Which in terms of skills requires a lot of patience because you're dealing with (inaudible), requires you to be able to look beyond what is obvious and see the potential of what things can be. Which may not be very easy to see now, but, some of it is objective, some of it is subjective.
And you put that into decision making framework and then realize that whatever addition you have made, there is only a probability of success. And you will go wrong. And that's part of the business. But, the only way to live life is passionately. So you keep on doing it. And if you're right more and more times than you're wrong, then you've done your job well.
It's the ability to do all your work and yet realize that there is only a certain chance that, while you may have done everything that you could have, there's only a probability attached to the fact that it'll work out in the way that you want to work out.
Akshay Datt: So in a way, you're saying that you need to be passionate and yet detached because, you can't get attached to every investment because you know that, let's say only two out of 10 investments will give you like, three x, four x, 10 x kind of returns, and two of them you might have to write off, and so on.
So being detached is important to be an investor?
Abhishek Sharman: Being objective is very important to being an investor in the sense of detachment. Somebody told me, which is quite parochial, but you'll get the gist, somebody told me that, your investments is like your daughter, while she's with you, she means the world to you, but you know that one day you have to let her go.
It's probably not the best statement where general equality is concerned, but I think it conveys the emotion very well of the way you have to look at your investments.
What about,
Akshay Datt: having a big picture perspective? I think the main difference between founders, especially first time founders who seek funding, is that they're very attached to their idea.
Whereas the investor looks at the big picture and says, okay, it's an interesting, innovative idea, but will it really scale up? For that an investor needs to look at the bigger picture, the total addressable market and the trends and so on.
So, my
Abhishek Sharman: perspective is slightly different.
It's all about execution. The idea that Tam, to a certain extent is less pertinent because in India there are many interesting forests. It also depends the kind of things that we invest in. So we are what you call a early-stage private equity fund.
So we look at which are between 30 and 200 crores revenues. So by the time, you are no longer backing just an idea, you're backing an idea, but there's also a certain amount of product market fitment, and you have a certain amount of execution in order to make money, in order to get to a certain scale.
Because our success is not dependent upon the fact that every company has to become a unicorn or has to become an Apple, a Google, or so, so forth. If you're looking for a four x, five x, you just need to have a 10 x exponential, which is that you need to capture the three, four x and the other guy was coming after you.
He should be able to see a three, four x. And that at the scale at which we enter into companies is possible in a large number of sectors with a large number of companies and a lot of founders. But I think what people and the founder community probably doesn't realize is that in order to visualize something when nothing else exists, you need a founder because you need an unreasonable man who needs to be attached to an idea, who needs to make it work despite all the naysayers and everything going wrong.
But to take something from zero to a hundred is very different from taking something from 100 to 1000 and that requires the whole process of institution building to kick in, team processes, the ability to let go, the ability to say that, I would intervene only in certain ways through certain people at certain points, and I would not like to be at the forefront of each and everything, so to say. That realization is very important. That commitment to institution building is very important and that focus on execution is very important. So, there are some funds which have this philosophy of go big or go home.
Akshay Datt: So, you are saying that that is not your philosophy. You're not looking at one or two of every 10 to be outsized returns and the others, then you don't care much about that. That's not really how you operate.
Abhishek Sharman: Yeah, we are looking for Michael Bevans. We're not looking for Virender Sehwag.
I'm not much
Akshay Datt: of a cricket follower. I know Sehwag of course, but I, I don't know the other name that you mentioned, but I'm assuming that's someone who's a consistent player.
Abhishek Sharman: Exactly. So we are looking for people who, we don't like losing money. That doesn't mean that we won't lose money, but we don't like losing money.
So you're right out of 10, maybe one or two don't work out. But to us at least, making it two x, three x in every investment is important because we are not coming in at that stage where we are not a classical angel or a VC fund in the sense where we are coming in at a very inception. And we are also not seeking 20% month on month growth.
We are seeking 25, 30% year on year growth. Because our view is that, there are very few businesses which can grow at that rate without the wheels coming off. And that kind of disproportionate growth, is only possible in certain situations. Let's say a tech platform takes off and so on and so forth, et cetera.
But most businesses, in order to do well, in order to thrive, don't have a very high benchmark. And if you look at a country like India and if you came to India in 2010 and you saw a company called Jubilant FoodWorks, it could be a 125 million dollar company at the end of that decade, by 2020, it was a 7 billion dollar company.
If you came to India in 2010, you may not have heard of a company called Page Industries, which sells Jock, where by 2020 it was a 5-6 billion dollar company. A Dabur or Pidilite trades almost at SaaS company kind of evaluations. And these are companies which don't do something which is, very disruptive, so the great Indian opportunity, because we are largely India focused one, the great opportunity in India is that we are looking at probably the biggest tion to the working population of the country that any country has seen across the earth at any point of time. This demographic is what we are playing most of the time we are not playing, necessarily a tech disruption.
And therefore the vantage point at which we look at businesses that, if you can build a consumer brand that appeals to people, or if you can build an organized service that appeals to people, which can target, the large middle class, apart from the bottom of the pyramid because at the very bottom of the pyramid you don't have purchasing power. But if you go a little bit above, I would say the bottom center of the pyramid, if the product service which is relevant for that segment, you can really build very scaled-up businesses. And these are business which can grow for the next 20, 30, 40 years.
And at that point in that category, you can play, a little safe. You don't have to play everything like 80-20 over, I mean, you can a 50 overview. You don't do test match, but you play 50 over one-day cricket.
Akshay Datt: Essentially you're placing a bet on the per capita income rising, more people coming out of poverty into middle income, middle class, and that middle class, driving more consumption of services and products. And so that is what you are placing your bet on.
Abhishek Sharman: So we are the confluence of two data points. One is, greater consumption. We keep talking about India going from 2000 dollar per capita GDP to 5,000 dollar per capita gdp. Now, whether it happens in five years or eight or nine, that's less of value. But directionally, that's where we are going.
Important part is a lot of these incremental purchasing, power, and therefore a lot of these incremental spends are going to come into consumer discretionary segments. So the ration has been taken care of. This is not going to go into dal chawal (inaudible) but it is going to go into categories which have so far, not been focused on necessarily because your core spends were always for core things.
And the incremental spend now therefore has a huge hockey stick curve. I talked about, pizza as a category, and who would've thought that in India you have such large pizza company. And we talked about Jockey innerwear, if you look at Maruti cars, Maruti Suzuki is more valuable than Suzuki. And there are many categories, for example, we think women shoes as a category.
We think pet services as a category. We think funeral service as a category. These are categories which we think are gonna explode. The other data point, which is important is that, one is a per capita element of it. The other is, the number of households of a country is actually a greater barometer of consumption rather than the population.
So, what's happening in India is what I call a nuclear family revolution. So India is moving from a joint family ecosystem to a nuclear family ecosystem. And when one household become two households, if your two brothers are living under the same roof, these two brothers who are living separately, spending goes up by factor 1.6 to 1.8 x because you need two of everything, and that is a greater barometer of how consumption is going to move, rather than the fact that we have a population of 4 billion, it's going about percent per Ann, and that's what people miss out on.
So because we are going to see more number of households and because we are going to see more per capita income. We are going to see both volume as well as propensity to spend increase. We are the conference of those two points and therefore there's certain sectors which will grow much more than other others.
So, maybe a guy making rice will make more rice, but his growth from a base level is going to be lesser than somebody who is a pet services player. And the base effect that he's going to see and the acquisition. That we've been,
Akshay Datt: Tell me about the journey of starting up on your own.
What made you want to leave India Equity partners and start on your own?
Abhishek Sharman: That's the natural, evolution that everybody seeks. I think the more interesting part is how did I think about private equity? And maybe I'll talk about that story a little bit. What happened was that, I was a student night in Delhi, I had gone to IIT, actually, I had gone to Delhi after being in small-ish towns like, and so on and so forth.
And, we were not initiated too many English movies and when I went to IIT, computers happened. And so in my first year I went to Nehru Place in Delhi and got assembled a computer basically myself. And we used to get all kinds of movies in all kinds of ways. We watched a huge number of movies, and another movie I watched was a movie called Pretty Woman.
And Richard Gere used to play a role there. Obviously you liked what Richard Gear did for many reasons, in Julia Roberts, but what caught my attention was that what does this guy really do? I was in the first in college and in, IIT you live in a hostel, you go to your seniors, because they tend to know all.
And you look up to them. And I went to many seniors and, most of them were not able to articulate until I bumped into somebody who could. And he said there's something called private equity. And that resonated. That resonated that, he's a guy who comes in, takes companies, buys them, takes their partners, various kinds of things in the process, also does other stuff.
So, therefore I am probably one of those people who have done nothing else in the lives but private equity, in that sense. I'm quite unique. I haven't come across to many other people who have done that, which could also be a weakness, that you know nothing better. So that attracted me to private equity, and there was always a desire that I had, not to join large platforms.
But be part of platforms where you could join at the very inception, very beginning and make it your own or go to the absolute top rather than, looking at a US based private equity fund where the bosses sit in Boston or New York and you are in India and you're spending a lot of time getting over the India story and why India makes sense.
I feel that you spent a lot of time doing stuff, it just understood and should not be core of any investment thesis. And that is why I chose the kind of private equity fund that I chose to be part of. And at certain point of time-
Akshay Datt: That's probably why after IIT, you went straight to an, IIM, because you had no intention to really take up an engineering job.
Abhishek Sharman: I was not good at it, I would've been very lousy at an engineering job. I went to IIT, I didn't go to engineering, engineering never fascinated me , that was a reality. And the good point about IIT is that more than what they teach you at, IIT, I think you get to test your metal against, some very, very smart people.
And that was, whatever you do in life, you're always very confident. And that is what I took out of IIT and it was very clear to me. Even in IIT, I went to Proctor & Gamble for an internship, which was a great institute, it taught me a lot. In about 64 days in, plant, which made Arial and tide.
And I tried to make the making machine in the backing machine, talk to each other. While it was an engineering problem, the solution for it was basically you take a bunch of people along, somebody who comes with technical experience, somebody who can do the problem definition well.
It was ultimately a managerial solution and, I felt that I had a lot of, logical sense. And, that itself is a rare commodity in life as a evolving figure out. And therefore, to me, going to a B school was a very natural process evolution. I could either have gone to a consulting firm like a McKinzie or I could've gone to a B school.
I couldn't do the first, but I could do the second, I went there. So, the transition was natural for me. And then because I wanted to do private equity, that the first chance I could get, I decided to go there. Chose firms, which were not necessarily the biggest brands, but where I could be more relevant and always quite a disproportionate amount of responsibility and experience.
That is why at the age of 33 when I decided that, I could try and do something which was my own, because the biggest issue was raising capital. And I was clear that if I could raise capital, I could do the rest.
Akshay Datt: Did the India Equity Partners experience shape your investment thesis?
What was the investment thesis there? What kind of companies were they investing in?
Abhishek Sharman: India Equity Partners was fairly diverse. They did investments, which ranged from 10 million dollars to let's say 35- 40 million dollars. Because I wanted to be independent, I wanted some responsibility.
I wasn't very senior, so nobody wanted to give me a lot of responsibility, so I ended up focusing on doing s million dollar deals in the consumer and services segment, and, some of my investments where I was part of the team turned out very well. One of them I made was in a company called Manappuram Finance, and we wrote Manappuram Finance from a company that was 400,000 crores in loan book to about 10,000 crores in loan book, so the company went public, created great value, almost a 7 x, in constant currency terms, over a five and a half year period.
So that was a great experience. Then I was on the board of this company called Quess Corp, which is now a listed company. It is India's second largest private sector employer, employees close to 50,000 people. And from it's very infancy we went through some very tough times, because we invested and then Lehman went down.
Nothing we did, but, we got impacted. We kept supporting the company, the company turnaround quite well. In 2013, we sold the company to Fairfax. We made close to 40% IRR, we thought we had done a good job. Saw making 16 next, taking it public three years later, and then, all those things were great learning.
I was associated with a few companies that did quite well. India Equity Partnersmade 16 investments across the board. Very diverse. But what it did was it gave me a very good vantage point in being able to see what works, what doesn't work, what are the elements that I really want to follow.
And what we did is that we borrowed what we ought to have kept. It is also constrained by the amount of capital you can raise and what you can follow and so on and so forth. The good elements of India Equity Partners was very much the edifice of what we created.
Akshay Datt: So, what did you learn about what doesn't work?
Abhishek Sharman: What doesn't work is cyclical, from a sector perspective.
Akshay Datt: What does that mean?
Abhishek Sharman: Getting investors in corporate companies, invest in infrastructure companies, invest in cement companies. It's very difficult from a private equity point of view to be able to time cycles.
Akshay Datt: Why are these businesses cyclical?
Abhishek Sharman: Because their output prices are linked to commodity prices. The output or input price are linked to commodity cycles. If steel goes up, it goes up and if steel goes down, it goes down. There's nothing that you can do about it.
The whole element if you go back to the of private equity, private equity is supposed to be able to generate alpha for you, which is an element of return, which is non linked to the market. And the core of it is access to operations of the business. So if you look at the classical private equity funds, which have become large, and they have now become more asset gatherers, rather than private funds, they started by buying out companies.
So if, when a black student buys a heed hotels or somebody buys a elevator, they take these companies, they install management, they're able to fundamentally make changes that is supposed to increase the operational efficiency of the business. So in private equity, when you're with that mindset, you don't want to buy a 6% ownership and whole series B preferred stock in the company, you want to own businesses.
And therefore we set a cis don't work. Small minority stakes don't work. Client reliance on entrepreneurs or promoters as you call them in India, doesn't work. Because in India you don't have a board on mechanism, most of the time you are backing, these unique individuals called promoters, which are a combination of founders, shareholder management rolled into one.
The challenge in India is to manage the promoters. The opportunity in India is to part of the superhuman individuals work called promoters. And therefore, you want be very careful about the kind of people. So, to me, it was important that, in India you can't be passive.
You can't say that, oh, there's a great guy. His name is Steve Jobs, and I'll give him some money and make a billion dollars, it doesn't work. India is also tough country to do business. There's the environment, which is tough. Making profits in companies very tough. There's so much taxation, directly indirectly that you have to deal with.
You're dealing with so many regulatory and compliance hurdles. So we said there are some elements that we want to take here. We want to back first generation entrepreneurs. We don't know want to back partner families. We want to take-
Akshay Datt: Why not? Why not partner with families?
Abhishek Sharman: Because, what's happened is that, if you look at wealth creation, it is moved from being generational to a single decade.
The logic of partnering with families was that, there are certain business families who know how to build businesses. So Dhirubhai Ambani starts a business Mukesh Ambani takes it to a certain level. Maybe the next generation takes it to XYZ level. And, that's all true. Elon Musk, is the richest guy in the world, and he's not a family business neither is Jeff Bezos, In India, I went to IIT, if you look at a lot of people my time, my juniors, my seniors, people who have done well, Sachin Bansal doing Flipkart, Deepinder at Zomato, Sujeet Kumar at Flipkart we all, in one generation a lot of wealth has been created.
The whole idea about partnering families was that they know how to build businesses and businesses get created over generations. That is no longer true. One good entrepreneur in a period of as small as five, six years can create a huge amount of wealth. So you want to back individuals.
And they could be professional entrepreneurs. We love professional entrepreneurs, people who know the business, they may not have the capital, but they understand governance, they understand, how to treat fiduciary capital and you back them and you work with them in the make or break innings, when 97, 98% of the network is inside the company.
And what we do is we take meaningful stakes, 26% plus stakes in these companies, spend a lot of time in this company. We like to spend about three, four days a month with these companies. So somebody feels that we're interfering or whatever, then we are not for them. With the whole idea being that, while we back these guys, we are co building businesses.
We are not passive. We are business partners in three out of eight portfolio companies fund, we are the single largest shareholders ahead of the promoter. We are always the second voice in the company. The most dominant voice in the company is always the entrepreneur. And we say that we want to not only get, investor money, but we also want to get customer money.
We like to say that 20% of the sales of the companies come because of us. We upon the financial controller. We, upon employer, we Ours is a very hands-on let's build businesses together kind of style. People who appreciate it will like us. And therefore, we choose very carefully. And that also happens because we don't have to do a lot of investments.
We do two investments a year. We do about seven, eight investments from a fund. None of our companies have a single rupee of government revenues. And, we think, again, if you look at how many businesses have been built by providing services to the government, it may be a very small, number, which has sold business.
So we therefore have learned our lessons. We think that, from our past life, my partners one was the founder of Quess the other was the CEO of dominoes and much for the company. So, so because of that, I think we have a sense of how consumer service business can scale up.
That's the beat that we understand. We have a style that works for India, and therefore that is what we're focused on.
Akshay Datt: Some of these things which you're talking about, are not considered very fashionable today. What's more in fashion in the last two years is, like hands off writing checks quickly kind of, approach, does this, hamper your ability to find the best investment opportunities?
Abhishek Sharman: The periods of time it does. Because, ultimately if you look at the pool of entrepreneurs, some of them do gravitate to ideas where you can get high velocity, high valuation capital.
So if there's a guy who's deciding to do entrepreneurship, and he has a choice between building a sustainable business, versus a choice of building a business where you can talk about multiple rounds of capital, and each round value you hire, you choose the other path, and that can happen. But that's why, I think it's important to have a value and belief system that is very core to you because it is very difficult to hold onto it, particularly when you get tested.
So if it is not very deep and not very intertwined with the core of who you are as an investor and what you impress as a philosophy, it is going to get tested. There's absolutely no doubt on that. But my point is that, you can make money by doing whatever you do. Profitability as the new mantra.
But these are not, blinding insights. You know that at some point of time, sooner rather than later, business has to generate cash. One can have a view on what that leeway is. And I can understand that in a world, let's say if you're paying interest rates and you say that there was a world where we are looking at a zero interest rate environment where capital today versus capital 10 years down the line had no difference.
Because the discounting rate was zero. You could have taken a much longer view. And today, when the discounting rates are going up, because inflations going up and interest rates are going up, you suddenly feel that cash today is more important than cash tomorrow. But, the fact that cash is king, the fact that profitably is good is not new.
It's just that, suddenly people believe at some point of time that this time it's different. And this time, it's a new world and to me it's a pendulum effect. You can deviate from the mean, but the mean remains the mean, so there's a period of time for which you can focus on certain other things because the world has been through phase.
Covid happened. Philosophy's changed. But in the long run, when you even out all those things, there are certain truisms I think which hold, and therefore what we practice is nothing which is binding inside, to be honest, this what has been many people in many points of time, in just about being able to execute on it.
Akshay Datt: So you said last year, companies were overvalued. What is the way in which you value a company? You are in a way taking a bet here, so how do you really value a company? What do you decide, this is the fair value for a company? Are there some rule of thumbs, like say, three X of revenue is a fair value for this kind of business?
Or stuff like that.
Abhishek Sharman: So what we do is we look at EBITDA models.
So, EBITDA is earnings before interest, tax, depreciation and amortization.. It is a proxy for operating income of a business. I It used to be EBITA but leave those technicalities aside. So business operationally, what is the kind of money the business can make? Now, the state which we come in is when a business is sustainable.
So we like to bring, come into EBITDA, break-even positive businesses. However, we understand that there's not level at which they're showcasing their end state EBITDA. So, lemme give you an example. Let's say when I invest IN a FMCG kind of company, let's say the company, is making ketchups and sauces. Now there's no point in me looking at a Heinz kind of multiple cause a Heinz is a very mature company and it makes, lots of EBITDA and it gets valued and priced an issue limited.
But I also don't want look at a situation where I go and say, oh, it should be three times sales or four times, five time sales. So what I'll do is, I'll say that, let's say here is a company, it has got 50 crores revenues. It is profitable, it is making let's say two, three crores, obviously it's not making a steady EBITDA.
Let's say this company, when it gets scaled up, will make a 15% EBITDA margin. Let me give the full benefit of that at the scales. Let's assume that at 50 crores it makes 15% EBITDA margins. And what multiple would that get me? This company was at 15 times EBITDA so it'll mean that I should give the company a 2.25 times enterprise value to sales margin.
Now the company is not making 50% EBITDA margins. And then I would say that that's what I would give it on on a full basis. And I would ideally want a little discount that's my own negotiation. But while I'm effective human sales multiple, which is let's say 2.25 times sales, the question is why am I not giving the four-time sales multiple?
Because we all have to look at valuation methodolgy that work for us. For VC who's bringing in companies that has no EBITDA, doesn't mean the value is zero. So they come with, let's say sales multiples and fraction multiples and so on, so forth. I look atinput EBITDA multiples and I would like to give the benefit of that.
But at the same time, that to me is the absolute maximum at which I would give the price. Now if a company for, example, is a personal care company, which is a 70% gross margin business and can deliver 30% EBITDA margins at steady state, I would deal with it very differently. In terms of the EV to sales multiple, but that EV to sales multiple has been arrived at by giving at imputed EV EBITDA multiples.
Because to me, ultimately this company has to be profitable.
Akshay Datt: The 15 times EBITDA multiple that you shared as an example, it varies from, sector to sector or what is the range? Like the multiple on EBITDA for which, the kind of evaluations that companies get?
Abhishek Sharman: It varies. So, for example, if you're looking at restaurant sector, you look at what are the restaurant coms.
I mean, when we did company like blues, we looked at the comset that was there for listed companies in the food and services space. And then if you're doing a Ketchup company like a, then you look at what would be the multiples for that. And when you looked at a mobile re-furbishing company like Yantra which is business that we sold to Walmart, we looked at what kind of multiples service businesses of that nature get.
So obviously the comset for different businesses is different. And that becomes the most pertinent way of doing because while theoretically the value of the company has, is a discounted value for the core cash flow to generate, but it's very difficult to project future cash values. It's very difficult and it's very sensitive, the assumption that you take so often.
CF ,cetera is a work of art. So the comset and the comset done across cycles, not only at this point in time, but a concept done across cycles, which gives you ranges that this particular industry is doing it right. Then adjusting it for your company, the kind of margins that it is likely to be able to exude.
And then providing multiple on that intake, that is what has worked best for us.
Akshay Datt: By comset you mean comparable companies set? Coming back to your own entrepreneurial journey, like in a way, starting a fund is also like, starting up as an founder yourself.
So you told me that you felt that the big challenge for you at that time was, raising capital. How did you solve that?
Abhishek Sharman: It's something which, is tough at the best of times, raising capital because, India is a starved capital market. In the US 90% of the private capital comes from US, in China till sometime back, over 50% of capitals capital so because your access to domestic capital is less, you have to go out and raise capital and therefore large scale pool of capital, can only be raised if you're able to access global markets. And that requires a certain set of things. For example, the global markets, lot people coming out of a brand.
If you worked at Sequoia and certainly you decided to fund Chance Institution capital is higher. We also saw a speed of managers who are actually, based abroad, but running India funds, and they were able to raise large capital because they were closer to the investor, and the investor felt more comfortable in giving them the capital rather than giving to people who are in India and who might know India better and who might be spending more time in India, but at the same time because they don't know them.
So capital raising, I think is a work of art. When I went to IIT I wrote an exam called JEE, I went to IIT, when I went to IIM I wrote exam called CAT. And here there is no example. It's a lot of intangibles. You're surprised that a lot of capital, some people are able to raise, you're surprised at how little capital some others are able to raise.
So it's difficult. But what happens is over a period of time it was challenge. It was exciting, but this was one thing that I needed to learn. Everybody wants to learn new things. So while I thought I knew investing, you never know investing, but you have a paradigm for investing.
You had a paradigm for dealing with entrepreneurs. This was completely new journey. So it was very exciting at some level. It was very challenging. And I think what really helped is that we do the approach that any start-up will take. I mean, a start-up will first go do a friends and family round, I mean, there are several start-ups who start with seed capital from somewhere.
Maybe, we, not one of them. So friends and family, and people close to us, raise the first fund, which was about 1.4 crores, from India last year, I think, thankfully what happened is that there was a ecosystem of institutions in India, and there were several people in India who were willing to look at the asset class.
Obvious the money was very small, so you had to go to many different people in their small share. But I think the AIF regulations, came in 2012. I think some companies, some institutions like Sed B for example, in India have play a phenomenal role in backing managers and creating that ecosystem.
Almost like a Y Combinator accelerator or something, for parts. So that ecosystem also came along. I think India started, doing a little bit more allocation, and then we also got better at it. Today we have investors from various different parts of the world. Obviously the mainstay of capital is still India.
And it's been an evolution. I would not say that we still have been able to raise very large amounts of capital, but that's the journey that we understand now, we are getting better at it. And today, if you ask me, is not necessarily the biggest challenge. My view is that what happens is that over period time, what you think of as challenges because you solve for them, actually become lesser of an issue than you thought they were when you started out.
But the set of things you did not see as challenges or did not account for actually become more pertinent pain points for you as time passes by.
Akshay Datt: So what are they now, these unaccounted for challenges?
Abhishek Sharman: When you start funding, you think your job is raising capital, finding great investments and, exiting and so on.
So I think when you run a business, you realize that, for example, people has become a very big challenge. Now, there was a time when, just because you are offering a private equity job, you could almost get anybody interested. No longer the case. Youngsters today, those who are coming to the workforce have many more opportunities.
Many of them think of the risk rewarded being an entrepreneur as being much better. And, so entrepreneurship is today probably the most attractive segment, for people who are looking at a career, even in private equity. What has happened is that the big have become bigger. The scale at which they operate, what they're able to provide, is very different for what an entrepreneurial private equity fund can solve too.
While you can give them equity, you can give them long term rewards, there is a huge challenge in terms of being able to match what other people able provide. I think all people are becoming huge challenge. The amount of time you end up doing stuff, which is regulatory in nature, amount of time you end up doing stuff, which is admin in nature is actually a very large proportion of your time.
Particularly, when you are also running a business, I mean, you are not doing rules. So the whole act of running a business takes a disproportionate amount of your time and you end up spending far lesser, than what you would like on doing stuff that you didn't like. Sit, discuss strategy, sit with a counterparty and negotiate a deal.
There's a lot of other stuff which you think existed, which actually takes a huge amount of time. So I think your ability to not get tired by all that anyways, defines your ability to be successful. And not so much, some of the poor things that we thought would be challenges, at least you realize (inaudible), and it's very different when you're an employee, you have a task too. You have to do two deals a year, you have to manage two three portfolio company and you do a good job of it. But to get to that stage where, you have an organization where each of them, each of us can do things that we really like to do. And the aggregate of that is enough for an organization to be able to fulfill all it's objectives.
That really to my mind is the holy grail of being able to build a institution.
Akshay Datt: You said only, 10% of money raised by private equity in India is from domestic sources. Why is that?
Abhishek Sharman: Because India, everybody sees so much opportunity. The largest families in India, if you go to Gautam Adani, or you go to Mukesh Ambani they will say give me the capital, I will generate the return.
The Rockefeller families and the Chanel families and the Bloomingdale families they and the Warton families, they all created businesses and now they're dynasties. The generations, the next gen, the gen after that, they're capital allocators.
They're not so much in terms of building they're more in terms of managing. They have gone through that phase, in India, we are still at that point of time that people are seen huge ability to create disproportionate amounts of capital. Generational businesses, are seeing this as a point of time where you can, create this disproportionate amount of size in those companies, the Tatas are seekers of capital, the Birlas are seekers of capital, the Manis are secrets of capital, the Adanis are seekers of capital. Everybody is a seeker of capital who's the giver of capital. The professional entrepreneurs who, the, and then another Italian, you also, so those are the kind of people who today are looking at managing capital.
They're looking at developing ecosystem for fostering entrepreneurship stuff. It is in a way hands-on and rightly so, they're seeing huge amount of opportunities. Mani just invested in some 80 billion investment in hydrogen. So, I don't think that, they're going to have spare cash to give to people, so that's a challenge. But I think it would be very different the next generation. Because, because that zeal is not a family zeal. There's nothing but a generational zeal. It's with individuals. And then as generations change, some people decide that, now I have a lot more to conserve than to build.
I've built enough. And at that point of time, things will change. But at this juncture, because, we are looking at a career or we are looking at a period of time, which is, let's say, for the next decade or two. If you look at that period of time, I don't think you can restrict yourself just to India, in terms of your aspirations in those categories.
Akshay Datt: So, take me through the resume of Carpe Diem. Like fund one was two hundred crores. What kind of investments did you do and did you get some credibility building with fund one that helped you to raise a bigger fund two. AnAnd whathat fund number are you at currently?
Abhishek Sharman: We are in the process of raising fund two currently. So we raised fund one. We did a final cruise in September 2016. Fund one does, well, we are on a invested capital level to work 29% IRR.
Akshay Datt: What does that mean? Because this valuation is subjective or is it based on actual exits or-?
Abhishek Sharman: So we invested across eight companies.
So we have time till 2020 to deploy capital, which we did. And then we have time till 2025 to exit our companies. So one out of the eight we have exited, we have return back 48% of the capital of the fund on that one exit.
We invested about, a little over 24.7 crores in the za. We hope we got back about a hundred. That happened at close to 34% IRR. The rest of the portfolio, we have had five out of the seven companies having markups. We invited, rebel Foods, which is a food unicorn in our food service company called Biryani Blues, which was at 4.6, 4.7 x of where we came in . We have seen similar products in our other companies. We have a retail company called One Indian Family Mart, where doing the Gulf Islamic investments. We have, designed build services company called Flip Spaces that does very well where we had an extra at about three x.
We have seen an upturn in our micro-finance business, which is called Sinduja Microfinance, where a sophisticated global micro-finance investor called NMI came in after us. And so we have portfolio weight companies in Fund one. We have, divested one. We have had approximately five and two of the other companies where we haven't raised further capital are profitable and have grown two and a half to three x, since we invested.
So we think we have a portfolio where, we may not see too many accidents, too many impairments, and which was in a particular difficult vintage we went through de monetization, we went through, the implementation of the GST regime. We went through several waves of covid and, what we invest in is not strictly tech, so we faced a lot of challenges, but I think we selected companies well.
I think we've worked hard at them and to our entrepreneurs the way they've kept the zeal and kept the module going in tough times. And that's why, as I said, the challenge and joy in India supported with these unique animal co promoters. That's been reasonable journey, I would say.
We are pretty satisfied with what we have managed to do. And, we are building our success. We are in the process of raising a 700 crore fund. We have, we have two there. We have also invested in a couple of companies from fund, capital deployment started our aim to look at seven to eight investments, like fund one, who work very closely with these companies.
So that in a nutshell is where we are as a company.
Akshay Datt: So, you said fund one, by 2025, you need to return the money. So does that mean you need to sell off your stakes in those companies by then? What does that imply?
Abhishek Sharman: In a nutshell, yes. There are mechanisms.
You can take extensions. You have to do that in conjunction with your investors in connection with the regulator. There have been situations where people have gladly extended. I think it was Bain Private Equity which held onto Staples for a very long time. Staples in the chain of retail stores in the US.
Because that company was doing very good and was doing some 15, 20% intermediary and so on, so forth. They felt there's no compulsion to sell, in India because there's a regulatory model also. So there is a finite life after which, even if investors want, the regulator may not oblige. So I think, we have to find solutions for these companies.
And there are a range of solutions which are available. The secondary funds, the continuation funds. So you move assets from one fund to other fund. You you could raise funds where you say that, I'm going to buy assets which are left out. Because typically what will happen in a primary style is that, and then we have less, and the people that have hundred investments in a portfolio and to find solutions for all of them is not always possible.
You can always write off investment, but that's not a good solution to find. So certain things need more time. And the parties that much like the primary market, the secondary market is also important.
Akshay Datt: So like your fund two could buy off, fund one companies and return the money to fund one investors?
Abhishek Sharman: That would typically not happen. If you have to do that, then you have to raise a fund specifically for that. So usually marking up your fundable investments from fund two are giving exits from fund one to fund two is bad practice. There are ways to do it. You have something called, LPAC, which is Limited Partners Advisory Council and they take both the LPs into concentration, get a fair market information done, and do something on that basis.
But the usual solutions are that you either go to a secondaries fund which can buy an entire portfolio, or you raise something called a continuation fund where you say that I'm raising this fund, which is a fund for fund one. It is going to buy companies off, fund one. These are the methodology that we are going follow while doing that trade because it makes sense. Which is leading with conflict. In our business, you have to be purer than Caesar's wife, as they call it. Your money, you can do whatever you like, but you're using other people's money if you want long term reputation ultimately.
So while many things can be done, and some people may do it, I mean, the best way to do it or the ideal way to do it is, create a solution. You raise money specifying that this is what you're going to do, and then you have a mechanism in place which is fair for fund one or the fund from where the assets are going.
And it's fair for investors of the fund.
Akshay Datt: I'm imagining that, the way your investments happen, it would be like a funnel where the top of the funnel would be, you would be scouting or you would be receiving inbound applications, and then you would have some sort of filter process, and then there would be some sort of deal making, negotiation happening.
Tell me about that whole funnel.
Abhishek Sharman: Funnel is that, we had more than 2000 opportunities that came through our door.
Akshay Datt: And these are inbound.
Abhishek Sharman: These are inbound. So we largely have three ways in Michigan deals. One is that we do a lot of proactive exercises. Because we have looked at when evolution of countries happen, what kind of categories get treated.
We talked about some of that earlier. So we have a view that these segments are going to do well. So those segments we don't mind doing proactive, scouting exercises where either through ourselves or by appointing an advisor, we go out and say that, let's scout for these kind of things.
So that's one. Second, we have a large amount of LPs, many of them are entrepreneurs in India. They run some businesses. They get a lot of deals, which then come our way, and the good part is that somebody who's in the trade or somebody who is running that business or running that kind of business, has some fundamental interest or at least a desire to evaluate the deal, and he's sending it to us.
And third is that we have a large network of boutique investment advisors and chartered accountants, who get us inbound deals. Many of these things you have to scrub a little bit because they're not, fancy presentations made by, Bank. But instead, these are things where you go through annual reports, you have to go through, whatever Excel sheets of data that are shaped with.
But sometimes you can really find nuggets, if you're willing to do that with the time. So through all these three processes, let's say we doing the course of fund one, while we fund one phase, we encounter more than 2000 deals only 300 of them met our objective filters, et cetera.
Akshay Datt: Like 30 crore plus top line?
Abhishek Sharman: 30 crore plus top line. It was slightly different in fund 1, in fund 2 there were different parameters, your revenue cut off, your sustainability cut off or your stake cutoffs and so on so forth.
Akshay Datt: First generation entrepreneur.
Abhishek Sharman: And then out of these 300, let's say, we would've engaged actively where we would've done a management call, poured through the numbers in about 60% of these transactions. If you got 300, then about 180 of those (inaudible), and then after one meeting or one call, et cetera, that number would drop to, 50. And we would've given term sheets out to 10 companies. We did diligence online and we investigate.
Akshay Datt: So my last question to you, we are like living in a new normal is what everyone says. How do you think, you will change in terms of your, investment thesis, your operating philosophy over the coming years?
Do you see that changing or do you think that these fundamentals will stay as they are?
Abhishek Sharman: Well, I don't think our fundamentals will change. When you say new normal, I think we are talking about in the investing world, we are talking about tech and we are investing about businesses, which, so for us, tech is means to an end, people, processes, tech capital are needed to build a business.
It's not that, our businesses are bereft of or devoid of tech, some of the best tech stacks that you can find, is the pioneering chef. We just don't need real food tech. Food tech for me is not necessary. One of the spaces has built a SaaS product, for the ecosystem, which has got great permission, but to us, people, processes tech, capital are means to an end, B2C is a channel of sale. We have to embrace it, but D2C is not a paradigm it's not destination, it's means to an end. So we have to imbibe, for example, if I could guide a company or even a partner, VIN, for example, he could guide a company in terms of how you should go about building your brand and what you could do digitally was not part of that. That needs to be imbibed, and you can't in a modern day of tennis play with a wooden racket. So you have to change the times, but the philosophy doesn't change. We still think that, if you want to look tech, you can go to Silicon Valley, you can go to Israel.
Tech is global. Everybody uses Instagram. And people will do tech, they'll do well. From our perspective, we are looking at a very compelling opportunity, which are very core to India, which is a market that we understand as Indians. I'm an Indian, I went to IIT, I went to IIM Indian, I stayed in India.
The most compelling option that India can give you today is the demography that you're seeing, which going to happen, and the kind of brands and services which you are going to see. In the process of these getting created, we embrace D2C as a channel. We embrace tech as source efficiency and we won't embrace that.
Our companies won't embrace that to us. You can't embrace it at the cost of building a sustainable, longer business.
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