Arul Mehra is Partner at Baring Private Equity India. Since 2010, Arul has worked with Baring on diverse investment portfolios along with investments in several prominent startups such as Lohum and Toch.ai among others. He brings in over 19+ years of combined experience in investing and has been an integral part of the investment and finance teams at Citigroup and Global Special Situations Group (GSSG) before joining Baring.
Q) Baring Private Equity Partners India is one of the earliest PE Funds in India, with more than 22 years of investment experience across sectors. How has your investment strategy evolved over the years, and which sectors excite you as an investor?
Arul: Baring India Investment strategy has consistently targeted the best available risk-adjusted returns in the Indian markets. We like companies serving large markets with significant entry barriers through brand, technology or distribution. Good management teams and governance is basic hygiene.
While the basic philosophy remains the same, the sectoral themes keep changing as the purchasing power, consumer behaviour, and technologies evolve. Though the initial funds got the best returns from IT Services, Pharma, Consumer and Financial Services, the last fund had its best performers from Saas, Fintech and Electric Vehicle ecosystem.
Further, we try to side step the most crowded segments in the market by focusing on spaces with less competition from other investors.
Q) As more than 50% of the essential climate variables are measurable only from space, do you see space technologies having a big play in the climate tech sector?
Arul: Space technologies can bring a lot of relevant data around ice and vegetation cover to track the real-time impact of climate change. Availability of hyperspectral data will further enhance the ability to track active wildlife and aquatic life, water tables and a mix of nutrients in oceans. These technologies will have a prominent role in assessing climate change impact and any corrective actions.
Q) Can you elaborate a bit on the difference between PE and VC investments?
Arul: Private Equity investments are in relatively larger companies with a lower risk-return profile. In western markets, there is usually a component of leverage (loans) in such transactions to juice up returns. Meanwhile, venture capital investments are usually in disruptive high growth ideas where potential payoffs are much higher, but there is a higher risk of mortality as well.
Q) Do you see the investment appetite evolving for deep technology and IP driven companies in India, despite most of the media limelight being either on FinTech or delivery companies? Can you provide insights on some key trends here?
Arul: We do see much higher interest in the space including our own investment focus. We see a lot of interest in areas like AI/ML in various industries, Space technologies both upstream and downstream, Electric vehicle component ecosystem and Biotechnology.
Media might usually chase large funding announcements, likely in sectors such as financial services, fintech and delivery operations that consume a lot of cash, which necessitates large frequent funding rounds.
Q) You led the recently concluded round of SatSure. What made you venture into spacetech and deeptech, and what were the key reasons for backing SatSure?
Arul: SatSure has all the characteristics of a deep tech company i.e. significant investment in R&D, limited competition, great pricing power due to its impact on customers business. What makes it extremely attractive as an investment is the large market size for its financial services and agriculture products. This was further validated by contracts from the best names in the market.
Their product requires a team that excels in three domains simultaneously i.e. spacetech, financial services and AI/ML. This will be a key driver of their moat initially as there is limited talent in both spacetech and AI/ML in the market.
Q) PE investing at an early stage of a company’s journey is not very common, but Baring has lately done some ‘VC styled’ deals, including, Acko, Lohum Cleantech, Toch.ai -. What factors are leading to such evolution in the investment strategy?
Arul: We strive to find the best risk-adjusted opportunities for our investors. Over the last few years, we have found great value in themes relating to digital, electric vehicles and artificial intelligence technologies. These areas do not have mature higher growth companies so we decided to engage in the early part of the ecosystem and invest in future leaders.
Q) While 2021 seemed to be quite the golden year for venture deal-making in India, do you think 2022 can be even better?
Arul: Fundraising by VCs is a leading indicator of activity, and fundraising has been robust for most players in the VC ecosystem. This would indicate a strong 2022 and 2023 as well.
There could be public market corrections due to rate hikes, or some sectors that have got over funded may not live up to the hype. However, this will only impact valuations and themes that get funded. When there is sufficient dry powder in the market, there will be deployment pressure to find the best ideas.
Q) The Indian space tech startup ecosystem has been gaining investor attention as the government announced the new space tech reforms. According to you, what and when would Indian space tech companies be interesting for PE players, both in India and internationally?
Currently, most space companies are at the design stage of the products. Private Equity players would start looking at the space after the product risk is mitigated.
Q) Since you have a few deep tech companies in your portfolio, would you be able to comment on the COVID-19 pandemic impact on the sector?
The impact of the COVID-19 pandemic was more industry-specific than whether the company was in deep tech. Fortunately, our technology-oriented companies operated in the areas of SaaS and electric vehicles (EVs) both of which grew very well over the last couple of years.
The EV companies did face some operating challenges due to manufacturing disruptions as WFH is not possible, but the subsequent shifts in consumer preference for EVs and resulting demand more than made up for it.
Q) What would be some of the focus sectors for Baring in India this year?
We will continue to be focussed on Consumer, Healthcare technologies, Financial technologies, Software as a Service and New Energy companies.
Q) Please share a few pieces of advice for aspiring entrepreneurs who are now starting up or scaling up?
If you come across a genuine problem to be solved, this is the best time to start up as substantial liquidity and support is available from the angel and venture capital ecosystem.
This article was originally published in The SatSure Newsletter [TSNL]