Avigo Capital is an independent private equity manager formed in 2003 with a focus on private equity investments in the SME sector in India.
At Avigo, Vivek’s key roles include deal evaluation and structuring, business performance improvement, corporate strategy and fund raising. Prior to this, he worked with Accenture in a management consulting role. He holds a degree in mechanical engineering and an MBA from INSEAD.
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| Vivek Subramanian Partner, Avigo Capital Partners |
How has been the performance of your portfolio companies so far?
Our portfolio, on aggregated basis across the 10 companies that we have now invested (as part of the $125 million SME II fund) grew at around 60% from last year to this year, and even better on profits-after-tax (PAT). Companies tend to grow faster on profits than on revenue. We incentivize them to do so. As for performance on a valuation parameter, I don’t have an immediate benchmark for these. We look at performance from a growth aspect, and more so on PAT perspective.
We are an SME focused investor. We are looking at investing in private companies that have over $30 million in sales (Rs 100-150 crore in terms of its range), and then scale them up towards $100 million in terms of sales. So, we are targeting companies that have a proven profitable track record. And then we put in growth capital to scale up from where they are to a significantly higher level. In terms of profits, from entry to exit, we almost see an increase of around 10 fold in our portfolio. We are dealing with smaller size companies in relative context, but they are still quite established companies and business models. We are more old economy focused, that means more of engineering, infrastructure, power, refrigeration, chemicals etc.
Given the current slowdown, has there been a change in your investment mix?
The slowdown will impact our strategy. However, we continue to remain bullish about our focus on the industrial segment. We continue to believe that it is where the long-term opportunity lies in India. For a 5-10 year horizon, we see no reason to change our long-term strategy.
SMEs, by definition, don’t have a very strong balance sheet. So in an event of a downturn, you would expect them to be impacted. In these difficult times, we are looking at slightly larger size companies than we did before. This means that while I would have invested in a Rs 50-70 crore sized company before, now I would have to look at a larger sized company. I am not excluding small size companies but as a preference, I would like to do a little more of Rs 100-150 crore company than I would to a Rs 70-100 crore company.
These are difficult times and therefore businesses that are more asset intensive would find it a bit of a challenge now to make sure that they get their capex expansions financed by banks. We have made a conscious attempt to look at those companies that have a lot more rigor or would be more favorable towards investments with a little less asset intensive focus. But there could be exceptions.
How are your portfolio companies reacting to the financial crisis?
Cash is king, more so for SMEs than ever before. Our investee companies’ response to the crisis has been fantastic. We have examples of companies that have rehashed their travel policies, all air travels now seek approval of the CEO, all hotel stays have been cut down, people are taking trains to travel etc. This is not because they are running out of cash. This is more of a philosophy. Everyone is talking about a slowdown, everyone is saying that the future is uncertain. Our companies are keeping a close watch on their expenses. They have reacted pro-actively.
We are spending a lot of time with our investee companies telling them what the crisis is all about and what potential impact it can have. At the same time, we are falling back on them as well to tell us what they are seeing on the ground. One of our entrepreneurs told us that he wasn’t seeing any slowdown on the ground. The reactions are varied. They are seeing the challenges on the financing side as it is the key aspect of their growth. You can’t grow very fast if you do not have the active support of your bankers. On the demand side, they haven’t seen a significant slowdown as yet, but they are keeping a close watch on that too.
What kind of back-end team you have at Avigo? How does it work with your investee companies?
SME investing is more about what you do after you have made the investment. We have a team of 16 people. If you look at some of the larger funds in India, they tend to outsource a lot of their work that is done internally by fund managers. Outsourcing can even be at the investment side, which means that some of the due diligence could be pushed out, even the business due diligence can be outsourced. And the other is post- investment outsourcing as part of which you can hire consultants etc. We are not comfortable with that. We have a vice-president or a principal and an investment manager dedicated to a company. Typically, a VP and an IM manage three-four companies. So the VP sits on the board. He manages the relationship, speaks to entrepreneurs on an everyday basis. The IM also interacts extensively with the promoter, the CFO and the operating personnel.
For us, the important aspect is getting the sense not only of how our investee companies performed in the quarter in terms of financial results, but also the challenges they face. Today, this kind of communication is more important than it ever was. It is also a risk mitigation mechanism because once we are on the ground, we can see the challenges coming very early, and that is useful. Nine out of ten companies that we have invested in are owned by first-generation entrepreneurs. They are very receptive to this kind of partnership. We appreciate that involvement. There is no avenue of work at the company that we do not involve ourselves in. Be it corporate strategy, recruitment, business development, new markets etc, all avenues are touched upon.
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regards
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