There is no blue­print for suc­cess in con­sumer brands

Mint Asia ST - - News - B Y J OJI T HOMAS P HILIP AR­JUN ANAND

Ex­its from portfolio com­pa­nies in In­dia have al­ways been a con­cern for pri­vate eq­uity (PE) as there are limited exit av­enues. Ini­tial public of­fer­ings (IPOS) are key to ex­its, ac­cord­ing to Ar­jun Anand, in­vest­ment as­so­ciate at Verlinvest SA, the Brus­sels-based fam­ily of­fice of one of the Bel­gian fam­i­lies re­lated to brewer An­heuser Busch Inbev NV (ABI).

IPO ac­tiv­ity in In­dia has been ro­bust of late, but Anand pointed out that only those Pe-backed com­pa­nies that have built up enough scale and prof­itabil­ity have been able to opt for ini­tial share sales.

“The av­enue that has not moved a lot is sec­on­daries—we are now start­ing to see some progress with a few VC (ven­ture cap­i­tal) and PE firms do­ing sec­on­daries for part of their portfolio but this is still in nascent stages and will need to de­velop,” he said.

Sec­on­daries are sales by one PE firm to another.

Edited ex­cerpts: Dur­ing an ear­lier in­ter­ac­tion, Verlinvest said Changededu, its ed­u­ca­tion arm, was slated to close a cou­ple of deals this sum­mer as part of its plan to de­ploy about $300 mil­lion in the next three-to-four years. Ear­lier this year, you had in­vested $30 mil­lion in Byju’s, an Indian-based ed­u­ca­tion tech­nol­ogy start-up. What is the sta­tus of other deals? Do you plan to bring Byju’s, too, un­der your Changededu plat­form? We are im­pressed by the size and po­ten­tial of the ed­u­ca­tion sec­tor in Asia. As a firm, while we have been look­ing at ed­u­ca­tion deals for some time, we took the call in 2016 to add ed­u­ca­tion as a strate­gic pil­lar of in­vest­ment at Verlinvest.

We have made three in­vest­ments so far in the sec­tor—xseed, an in­no­va­tive cur­ricu­lum pro­gramme for schools with over one mil­lion chil­dren on the plat­form; Byju’s, the lead­ing ed-tech company in In­dia, and Changededu (Hold­ings), the ed­u­ca­tion plat­form founded by Brian Ro­gove, the ex-asia-pa­cific CEO of Cog­nita group of schools.

Changededu has made good progress over the sum­mer by clos­ing a few ac­qui­si­tions and building up a full team to in­te­grate, man­age and ex­pand these as­sets.

Byju’s in In­dia is an in­de­pen­dent mi­nor­ity in­vest­ment made by us early this year. There is no plan to bring it un­der the plat­form. When you look at the ed­u­ca­tion sec­tor in In­dia and South-east Asia, how big is the op­por­tu­nity? Which are the key mar­kets? Is there scope for re­gional or pan-asia firms in this space, and if there is, which sub-seg­ments within ed­u­ca­tion will be most con­ducive for them? Ac­cord­ing to some es­ti­mates, Asia-pa­cific makes up one-third of the global ed­u­ca­tion ex­pen­di­ture—which is over $5 tril­lion. So, on the face of it we are talk­ing about a mas­sive sec­tor. How­ever, it is highly frag­mented and there are few play­ers of global or pan-asian scale and this is re­ally the na­ture of the sec­tor and we don’t see that chang­ing funda- men­tally. So firms like ours have to be care­ful in se­lect­ing seg­ments and op­por­tu­ni­ties that have limited reg­u­la­tion and have high growth po­ten­tial.

The seg­ments that are par­tic­u­larly in­ter­est­ing to us in Asia are English lan­guage train­ing, K-12 ser­vices which don’t directly fall un­der fully reg­u­lated ar­eas and en­rich­ment ser­vices which cater to chil­dren postschool. Of late, sev­eral PE firms are look­ing at the ed­u­ca­tion space. We re­cently saw EQT in­vest in Viet­nam’s English lan­guage trainer ILA. With in­creased in­ter­est in this sec­tor, are val­u­a­tions a con­cern? Yes, the ed­u­ca­tion sec­tor has been through a few cy­cles with pri­vate eq­uity and we are see­ing ris­ing in­ter­est in the sec­tor from PE funds. This cer­tainly has an im­pact on val­u­a­tion, es­pe­cially on deals be­yond a cer­tain scale. How­ever, we are op­ti­mistic of the long-term po­ten­tial of the sec­tor which, has a large head­room for growth and de­vel­op­ment. Not just ed­u­ca­tion, but are val­u­a­tions a con­cern in the sec­tors that you are in­ter­ested in? Also, which are your fo­cus sec­tors and what are your plans for these sec­tors in In­dia and South-east Asia? Val­u­a­tion mul­ti­ples re­main much higher In­vest­ment as­so­ciate, Verlinvest SA in Asia than in Europe or the US be­cause of growth ex­pec­ta­tions; but this growth is not uni­form across coun­tries and sec­tors, so we are care­ful to pick the spa­ces we play in. Our pri­or­ity sec­tors are food and bev­er­age, re­tail and hos­pi­tal­ity, e-com­merce and ed­u­ca­tion. Ex­its have al­ways been a con­cern in In­dia. How do you see this sce­nario? This is al­ways a con­cern in In­dia as there are limited av­enues to exit. IPOS re­main the key one, and it’s good that the cap­i­tal mar­kets have opened up with a num­ber of Pe-backed com­pa­nies list­ing re­cently. How­ever, these are only for the ones that have built up enough scale and prof­itabil­ity to launch an IPO. Trade sales are few and far be­tween and we hope to see in­creased in­ter­est from strate­gics in mar­kets like In­dia in the com­ing years. The av­enue that has not moved a lot is sec­on­daries. We are now start­ing to see some progress with a few VC and PE firms do­ing sec­on­daries for part of their portfolio, but this is still in nascent stages and will need to de­velop. Be it In­dia or South-east Asia, why should any company come to Verlinvest other than for cap­i­tal? How much do you bring to the ta­ble other than cap­i­tal? Glob­ally, as a firm, we op­er­ate only in the branded con­sumer space. Our heritage, network, past and cur­rent in­vest­ments and ex­per­tise have all re­volved around this very fo­cused area. Hence, in our four ver­ti­cals of in­ter­est, we bring con­sumer brand ex­per­tise that help us on in­vest­ment strat­egy as well as de­vel­op­ing our portfolio com­pa­nies.

To add to our ex­pe­ri­ence in creating large global con­sumer brands, we work with ex­pe­ri­enced op­er­a­tional ad­vi­sors who have re­tired from global lead­er­ship teams of large con­sumer com­pa­nies and have been as­so­ci­ated with us for a long time.

For ex­am­ple, Chris Burggraeve, the EX-CMO (chief mar­ket­ing of­fi­cer) of AB Inbev, is an op­er­a­tional ad­vi­sor and helps sev­eral of our com­pa­nies.

Sim­i­larly, Bernard Hours, the EX-COO (chief op­er­at­ing of­fi­cer) of Danone Glob­ally, is an in­de­pen­dent board mem­ber of Verlinvest and an ac­tive op­er­a­tional ad­vi­sor to our com­pa­nies. We are very open with our network and ex­pe­ri­ence with our portfolio com­pa­nies, which adds value to the en­trepreneurs and man­age­ment teams.

As a fam­ily in­vest­ment company, our in­vest­ment phi­los­o­phy and struc­ture is to cre­ate share­holder value over a long in­vest­ment hori­zon which can be sub­stan­tially longer than the 3-5 years hori­zon of typ­i­cal pri­vate eq­uity funds.

This means that Verlinvest is able to align it­self with the man­age­ment and the other share­hold­ers on how to de­velop and ex­e­cute long-term de­vel­op­ment plans with­out the typ­i­cal exit con­sid­er­a­tions which some­times con­strain the abil­ity of fi­nan­cial buy­ers.

We un­der­stand that young con­sumer brands re­quire a sub­stan­tial amount of time and cap­i­tal to ma­ture and reach the goals of its cre­ators and part­ners. Hence, this phi­los­o­phy helps us.

For ex­am­ple, one of our portfolio com­pa­nies in Bel­gium called Ar­monea, a lead­ing nurs­ing home oper­a­tor, has been a Verlinvest portfolio company for more than 12 years.

Fi­nally, our team is a good mix of both in­vest­ment pro­fes­sion­als and in­dus­try prac­ti­tion­ers with hands-on ex­pe­ri­ence. Our team is ac­tively en­cour­aged to work in our portfolio com­pa­nies and sev­eral mem­bers have been sec­onded in com­pa­nies for a few years. For ex­am­ple, Nick Ca­tor, who leads our Asia busi­ness, was ear­lier the CEO (chief ex­ec­u­tive of­fi­cer) of Ar­monea, our nurs­ing home in­vest­ment in Bel­gium. When you look at deals, is there a cri­te­rion in terms of how you can syn­er­gize? For ex­am­ple, you have busi­ness in Europe and when you look at deals in In­dia and South-east Asia, do you see if the company you are talk­ing to, or if your ex­ist­ing portfolio com­pa­nies can lever­age this? We use a lot of the ex­pe­ri­ence and knowl­edge of con­sumer trends across ge­ogra­phies and in our in­vest­ment de­ci­sion mak­ing. We ac­tively en­cour­age our busi­nesses across the globe to in­ter­act and host tai­lored ses­sions around top­ics like lead­er­ship, or­ga­ni­za­tion and brand­ing for our CEOS across portfolio com­pa­nies.

We also ac­tively look­ing at tak­ing our brands global—and this is where some syn­er­gies start to ma­te­ri­al­ize across our firms. How­ever, there is no blue­print for suc­cess in con­sumer brands and each geog­ra­phy and busi­ness is dif­fer­ent. Where pos­si­ble, we lever­age ex­per­tise and strengths of our portfolio firms with each other. Has the Prime Min­is­ter Naren­dra Modi gov­ern­ment de­liv­ered on its prom­ise to im­prove the ease of do­ing busi­ness? The Modi ad­min­is­tra­tion has cer­tainly made it a pri­or­ity and is quite vo­cal about it to im­prove the ease of do­ing busi­ness and es­pe­cially less­en­ing the tra­vails of small com­pa­nies. We have al­ready seen progress over the last few years but there is still some way to go to move up sig­nif­i­cantly and in com­par­i­son to western mar­kets.

Val­u­a­tion mul­ti­ples re­main much higher in Asia than in Europe or the US be­cause of growth ex­pec­ta­tions; but this growth is not uni­form across coun­tries and sec­tors. The ed­u­ca­tion sec­tor has been through a few cy­cles with PE and we are see­ing ris­ing in­ter­est in the sec­tor from PE funds

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