The art of reinvention

There is on old saying that it's a fine line between success and failure, and Ashish Dhawan probably appreciates the truth in that expression more than many. In media reports in his home country, the founder and senior managing director of New Delhi-based ChrysCapital has on occasion been haild as the “pioneer of the private equity industry in India” and also – since the firm's recent runaway fundraising success (of which more later)-the “550 million dollar man”.

But, far from having his head turned by such plaudits, Dhawan comes across as modest and down to earth. Perhaps the reason for that lies in the awareness that, instead of being hailed for his achievements, he could instead have sunk to anonymity as one of the countless victims of the dot-com crash.

We'd learned the hard way. I'd never invested in early-stage businesses before and we didn't have the competencies to steer those businesses through road blocks

Dhawan's career path began in the US, A graduate of Harvard Business School, he worked in the risk arbitrage group at Goldman Sachs and the mergers division at Wasserstein Perella as well as gaining private equity experience at IT investment specialist McCown DeLeeuw & Co and Brazil's GP Investimentos.

Returning to his home country in 1999, Dhawan launched then-named Chrysalis Capital, the forerunner to ChrysCapital. Of his motivations, he says: “We saw a clear opportunity following the economic reforms of the early 1990s. The aspiration of entrepreneurs had grown, there was a commitment to better corporate governance, and there was improved regulation in many sectors. Those were the changes that led me to believe that the Indian market would take off in the way that China had done in the early 90s.”

Chrysalis raised a debut fund with $64 million in commitments. However, as those well versed in the recent history of private equity will know, any fund with a 1999 vintage should, with the benefit of hindsight, have carried a health warning. “We launched in go-go times,” says Dhawan. “We blew through capital in 99 and the first half of 2000, investing 40 percent of the capital into dotcoms.” In all, the firm backed ten dotcom business, seven of which ended up being written off. “We destroyed the capital very effectively on the internet side,” Dhawan ruefully reflects.

And here's where the “fine line” analogy referred to at the outset becomes relevent. Had Dhawan and collegues come down with an even more severe bout of internet fever, and perhaps gambled between half and two-thirds of the fund in this way, the ChrysCapital story might have begun and ended with Fund I.

As it was, the remaining 60 percent was committed to growth capital sitations – and this part of the portfolio turned out to be a runaway success. For example, Spectramind, an IT business backed in 2000, went on to deliver a six times multiple when sold two years later. In all, the growth deals delivered a 100 percent IRR, enabling the fund as a whole to boast a highly respectable 31 percent IRR on an aggregated basis.

PIPE deals are still part of our plan on an opportunistic basis but we're in the middle of a very robust period for the stock market so, on the whole, there's not as much value in listed companies

Having emerged in better shape from its debut fund than many peers, ChrysCapital had nonetheless been chastened by its dalliance with the dotcom debacle. Before Launching a second fund, Dhawan says the firm realised it was time to “figure out carefully what to do next”. “We decided we would focus on growth capital or buyouts and not venture,” he relates.“We'd learned the hard way. I'd never invested in early-stage business through road blocks. Our skill lay in identifying companies with track records, run by happy to back as minority investors.”

At the same time, ChrysCapital elected to diversify away from what was then a business process outsourcing (BPO) bias to embrace a range of sectors which now encompasses business services, financial services, pharmaceuticals/healthcare, industrials, infrastructure and consumer. This was done to ensure that the firm had the domestic growth opportunity covered in addition to India's long-established export story. It was decision that turned out to be more groundbreaking than originally envisaged.

Explains Dhawan: “As we looked at the universe of companies that resulted [from the decision to diversify], we realised that around half of them were listed. The preponderance of small, quoted companies is a nuance of India – we have around 8,000 listed companies, of which about 7,500 probably shouldn't be. They are, in effect, private companies because they have no liquidity, only one owner or a large majority shareholder and have revenues typically less than $100 million.”

Consequently, from 2001 onwards, ChrysCapital found itself in the vanguard of Indian “public private equity” investment, otherwise known as the PIPE (private investment in public enterprise). Perhaps sensitive to potential misunderstanding, Dhawan points out that deal of this type in his home country are quite distinctive from their equivalents in Western markets.

He elaborates: “In the US, PIPEs normally involve companies that are broken, as a result of which they're unable to access public capital. In India, they're overlooked but not broken.”

It would seem reasonable to assume – at least from a Western perspective – that a private equity firm choosing to pile cash into public markets is a strategic move likely to be viewed with a lack of enthusiasm by limited partners. Nonetheless, outsized returns will soon change minds. In 2001, the firm's first PIPE deal was a $14 million investment in Mphasis, an IT services firm. By the time ChrysCapital had achieved its final sale of shares in the business in 2005, it had achieved a more than four times cash multiple. Among other PIPE successes, construction firms Gammon and IVRCL delivered cas multiples of four and five times respectively.

Far from alienating its investors, ChrysCapital's plunge into public markets had them drooling. To briefly turn the clock back, Dhawan relates that, in 2001, when the firm lauched its second fund into the market, fundraising was a tough slog. “It was a very difficult time. India was still a relatively unknown story and that was the hardest time we've had on the fundraising trail.” The commitments eventually trickled in, he says, because of the “bright sparks” that were beginning to appear in the first fund – but it took a long time for the fund to finally close on $127 million (a little more than its $100 million target).

The preponderance of small, quoted companies is a nuance of India – we have around 8,000 listed companies, of which about 7,500 probably shouldn't be

But when ChrysCapital came to launch its third fund in 2004, the PIPE deals were beginning to deliver. As a consequence, raising what ended up being a total of $258 million became, in Dhawan's words, “extremely easy”. He elaborates: “We got the fund raised within 60 days of the PPM being issued and it was way over-subscribed. Existing LPs came back and wanted to double their commitments.” By this stage, not only had the first fund posted a higher than expected final return but the second fund's realisations to date put its IRR in the high 30s.

While the firm's PIPE deal strategy was being slowly vindicated during the third fundraising, it was only by the time the fourth, and most recent, fund was launched that the biggest successes had been posted. When the fund reached a $555 million final close in March 2006, the IRR from fund III was standing at around 100 percent, according to the firm.

Assisted by these results, ChrysCapital was also by this time the beneficiary of increased interest from international investors in the Indian market. But while other Indian GPs have had varying degrees of success at exploiting this appetite, admirers of ChrysCapital say it has done so more effectively than most of its peers. Dhawan says the firm raises around 70 percent of its capital from the US and that investors include a range of endowments, foundations, families, banks and funds of funds.

One of the backers of ChrysCapital's latest fund is Boston-based Siguler Guff's BRIC Opportunities Fund, the first private equity fund of funds to target opportunities solely in the emerging markets of Brazil, Russia, India and China. “What I especially like [aout ChrysCapital] is the teams's combination of deep domain expertise in choses sectors, reevant operating experience, consulting skill, and investment discipline,” says Patricia Dinneen, amanging director at US fund manager Singuler Guff.

At this point it would perhaps be all too easy for Dhawan to start surrounds his firm and assume that the tough times are a thing of the past. Far from it: as mentioned earlier, he doesn't seem like the kind of person to let success go to his head. What is more, complacency appears all the more unlikely to surface when you consider that Dhawan was on record earlier in the year as being “not bullish” on the Indian market's prospects.

In addition, since raising been in transitional mode – this time involving a move away from the public markets. Explains Dhawan: “PIPe deals are still part of our plan on an opportunistic basis but we're in the middle of a very robust period for the stock market so, on the whole, there's not as much value in listed companies. Therefore, out of the current fund, we're mostly doing private investment.”

Cynics might question ChrysCapital's ability to continue outperforming while lessening its reliance on what has proved an extremely helpful stock market. In the private arena competition is tough, and not only from an ever lengthening roster of private equity funds: hedge funds too are emerging as a competitive force. Perhaps more than ever, the firm's ability to identify what Dhawan describes as a “proprietary edge” will be put to the test.

Year of inception: 1999 (as Chrysalis Capital)

Offices: New Delhi (headquarters), Mumbai

Key personnel:Asish Dhawan, founder and senior managing director: Brahmal Vasudevan, managing director: Ravi Bahl, managing director; Kunal Shroff, managing director; Sanjiv Kaul, managing director; Gulpreet Kohli, principal; Sanjay Kukreja, principal; Ashley Menezes, chief financial officer

No of investment staff: 13

Funds: Fund I (1999) $64m; Fund II (2001) $127m; Fund III (2004) $258m; Fund IV (2006) $555m

Current investments include: Idea Cellular (telecom); Moser Baer (CD and DVD manufacturer); Moser Baer (CD and DVD manufacturer); Suzlon (world's sixth-largest wind energy company); yes Bank (private sector bank)

Past investments include: Baazee (online auction firm sold to Ebay in 2004); IVRCL (construction firm sold to Ebay in 2004); IVRCL (construction firm exited in April 2005 via public market); Mphasis (listed software services firm exited in two tranches in 2004 and 2005); Spectramind (BPO provider sold to NYSE-listed Wipro in 2002)