Significant funding gap for mid-market companies: Heramb R Hajarnavis

SeaLink Capital Partners (SCP), the private equity firm founded by former KKR (India) executives Heramb R Hajarnavis and Karthik Narayanaswamy, announced the final close of its debut fund at $315 million (Rs 20.4 billion). Heramb R Hajarnavis tells Ranju Sarkar about his investment philosophy and fund-raising experience. 

What is the opportunity in mid-market? What would be your investment strategy and focus, sector-wise? 

There are close to 12,000 mid-sized companies (with annual revenues of $10-$150 million) in India. These are growth engines of the economy, filling crucial need gaps. Several of these companies aspire to be bigger and more efficient in their operations, but are restricted by inaccessibility to financial capital and strategic and operational mentorship.

While larger companies have the opportunity to access equity or debt financing from public and private markets, including private equity, it is a different story for mid-size companies. Only one in six such firms is publicly listed. For most of the others, the main source of capital is bank or lender financing that comes with the burdens of high interest and tedious approvals.

SCP has a differentiated investment and value-creation strategy. We are focused on active partnerships with exceptional Indian companies that have demonstrated strong growth potential and competitive differentiation in select industries.  Our approach is to go beyond  financial investment and work collaboratively with management teams to accelerate their growth and help them achieve their full potential through best practices. 

Our areas of focus are the healthcare, information technology, financial services, business services, consumer products and niche manufacturing sectors. The target investment is from $15 million to $50 million, with the flexibility to scale up commitments selectively. 

How challenging was fundraising? Why did it take so long for you to close this fund? Is the limited partners (LP) outlook changing towards India?
We have had tremendous support in the ecosystem, but there are challenges that we had to overcome. 

We were a first-time fund. Regardless of our extensive experience base in investing and operational value addition, good team-working spirit, and attractive track record as a professional, from an LP’s perspective we are still a first-time fund.

Though global investors are interested in India and believe in its long-term potential, they have been sceptical because of the lack of exit for private equity investments. This does seem to have improved recently and, I believe, with more investors receiving capital back, their view on the Indian market should become more favourable. Nonetheless, I think LPs are carefully evaluating the evolution of the industry in India and their journey from the notebook to the cheque book is not going to happen in a hurry.

Why it is easier to raise a small venture capital fund or $1-billion fund in India than to raise a $200-million to $300-million fund?

There is a sense of excitement in the start-up world, which has had a positive impact on venture capital fund raising.

I believe the relative historical nonchalance of private equity firms towards the sector is linked to capital requirement. The amount of funding that can be absorbed and effectively utilised by mid-sized companies is not very high. For private equity firms, the effort and time taken in due-diligence is fairly similar between a Rs 1-billion deal or a Rs 10-billion deal. With a focus on deploying capital, there is a much stronger bias towards larger deals.
There is not that much capital looking to partner companies 

that are Rs  1-1.5 billion in size and aspiring for the next stage of growth. Our analysis shows a significant funding gap that has emerged for mid-market companies and, we believe,  this represents  an opportunity.