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How has Gaja’s investment strategy evolved over the past 16 years as a mid-market fund manager in India? Has increased participation from global GPs seeking large cap deals changed the opportunity set for Gaja?

Since its inception in 2004, Gaja’s focus has been on investing in mid-market growth businesses – companies with an enterprise value of USD50-100m with a view to mapping out a clear path to USD1b in EV over five to seven years. While Gaja began as a growth minority investor, the firm has evolved into one of the leading players within India’s mid-market buyout/control space and has built a significant in-house operating expertise.

Over the past five years, we have witnessed the development of an attractive supply/demand dynamic for mid-market managers. The advent of both global and local venture capital firms in India has led to entrepreneurs becoming more familiar with and open to the possibility of working with financial investors, which, in turn, has created an attractive pipeline of investment opportunities for Gaja. Simultaneously, the increased participation of global GPs seeking large-cap deals has created attractive exit routes for our portfolio companies as large-cap managers investing in India seek institutional quality investment candidates with significant growth potential. 

Gaja is active in the education, consumer, and financial services sectors in India. Please share some examples from the portfolio that highlight the specific opportunity in this space, touching on market segments, demographics, digitization, and other drivers.

The education, consumer, and financial services sectors in India are driven by growing domestic demand – an appealing long-term secular trend that Gaja Capital believes insulates them relatively well from volatility in global financial markets. These sectors address the core needs of India’s rapidly growing middle class, a demographic expected to almost double to nearly 300 million households over the next decade.

In education, Gaja invested in Educational Initiatives, an Indian edtech company focused on K-12 assessment, adaptive learning, and improving learning outcomes through tech-enabled personalization. To date, the company has engaged with over ten million students under its Large Scale Education Programmes and provided learning solutions to children in low-income government schools in Indian society. As schools and students look to the new norm in a post-Covid-19 world, Gaja anticipates that tech-enabled education will become ever more relevant.

In the financial services sector, Kinara Capital, a non-banking financial company, is addressing the large and underserved MSME market through a differentiated strategy of providing loan products without physical collateral. To date, it has funded close to 25,000 MSMEs through more than 34,000 loans.

A further recurrent theme across Gaja’s portfolio is female empowerment. Gaja has supported the creation of substantial opportunities for women, employing more than 25,000 women across its portfolio companies in Funds II and III. These companies have also invested significantly in the mentorship, education, and financial inclusion of women. For example, women entrepreneurs dominate the franchisee base for EuroKids, accounting for more than 80% of its 1,000+ franchisees, and two of Gaja’s portfolio companies, Kinara Capital and Chumbak, have women co-founders.

Who were the LPs in your first fund and how has your investor base evolved over time? How is this evolution a reflection of international and/or domestic demand for exposure to Indian PE?

While India has developed a sophisticated private equity industry over the past twenty years, it has not seen the same depth in domestic institutional investors. However, thanks to its strong entrepreneurial spirit and attractive corporate infrastructure, India continues to draw attention from institutional investors around the globe. As a result, Indian private equity managers, of which Gaja is no exception, have largely been backed by foreign capital. This has come in a number of forms – DFIs, funds of funds, pension funds, endowments, and foundations.

These investor groups have long been supporters of India, but, as the investable universe deepens and managers consistently deliver liquidity to investors year-on-year, we are seeing greater interest not only from different investor types, but also from new geographies such as Japan and Australia. We believe that the ability of Indian managers to create co-investment opportunities for their investors will further cement the wider LP interest in the country.

Over the history of Gaja Capital, our investor base has evolved from international HNWIs and families in its earlier funds to large global financial institutions in Fund III. As we look to Fund IV, the universe of international investors seeking exposure to India continues to expand. In parallel, a dialogue around domestic private equity opportunities is also growing among Indian institutions such as pension funds and insurance companies, and we therefore expect this to be the next chapter for Indian PE.

You recently exited EuroKids International via a sale to KKR. What role do large international PE firms play in the Indian exit space and do you foresee more sponsor-to-sponsor exits in the future? What is the typical holding time for your investments and which exit strategy has proven most successful for you in the past?

According to IMF’s World Economic Outlook Database in April 2019, the Indian economy has close to tripled in scale over the last fifteen years and the exit markets have comparatively matured, resulting in an increase in financial, strategic, and public buyers. In the past, public markets had been the principal liquidity route for Indian private equity, however, the market has evolved with an increase in exits via trade and financial sales.

Gaja has successfully delivered liquidity events via all main routes – IPOs, financial sales, and strategic sales – however, we believe that financial sales will become increasingly prevalent going forward. The arrival of large global buyout firms has driven a significant demand for institutional quality growth companies with an enterprise value in excess of USD200m. This has in turn driven – and will continue to drive – the appetite for financial sales for portfolio companies such as Gaja’s. While Covid-19 is expected to have an impact on exit volumes in the short-term, we believe that demand for high growth opportunities will continue in the long-term.

In terms of holding period, Gaja is very focused on active engagement with its portfolio companies to create organic and inorganic growth, as well as to drive real change at the operational level. For this reason, we expect to hold our investments for five to seven years. This timeframe enables the investment and operating teams at Gaja to fully maximize the growth opportunities available to our companies.