Q&A: Creador’s Brahmal Vasudevan
04.11.15 / Author: Tim Burroughs, Asian Venture Capital Journal
Creador targets mid-market investments in Southeast Asia and India. CEO Brahmal Vasudevan explains why he sees limited competition outside of India, and why he’s excited about the Philippines.
Q: Fund I closed in early 2013 and then Fund II closed in late 2014. Now you are in the market with Fund III. Do you get a lot of questions about the pace of fundraising?
A: Pace is certainly one of the questions we get these days; people ask if we are going to be raising a fund every two years. We say that we have faced very little competition in our target markets and we have a highly proactive approach – we have 45 staff going out and looking for deals – so we have been able to generate a lot of high-quality investments. Also, despite being quite young, we’ve had three exits from Fund I and returned almost two thirds of the capital committed. So while we have been raising money quickly we have also been returning money quickly. Having said that, our current fund that is going to be a little bigger than the previous funds, so it will be invested over a more normal cycle – 3-4 years.
Q: Why do you think Creador faces minimal competition in markets like Malaysia and Indonesia?
A: Markets like Malaysia are generally too small for the big guys; they want to do $75-100 million deals but most transactions are $20-40 million, and there are only 10-12 each year. It is also hard to raise a country-specific vehicle – even in Indonesia, after the buzz ended, there aren’t many GPs focusing on the smaller space. If you look at India when ChrysCapital started in the early 2000s, it was difficult to raise money then as well. There wasn’t a long track record of realizations. Things were very quiet until 2005-2006 when the markets went up, a lot of people starting exiting investments, and then an avalanche of new people came in. Over the last 4-5 years, Indonesia’s economy has slowed, the currency has fallen 30%, and there haven’t been a lot of realizations. This is one of the reasons why we started with a multi-country strategy: India, Malaysia, Indonesia and now the Philippines. People see diversified risk and they see us picking the best deal rather than being forced to do a deal because the mandate only allows us to invest in a particular market. That flexibility is extremely important.
Q: How have the funds been invested across the three core markets?
A: It’s been roughly one third Indonesia, one third Malaysia and one third India. The difference between Malaysia and Indonesia and India is that in India bankers come to you with deals; in Malaysia and Indonesia we create deals by talking to companies and encouraging them to raise capital. If we just sat back and waited for things we would probably end up doing maybe just one deal a year in each market.
Q: What about control deals versus minority investments?
A: It’s been one third control deals and two thirds minority. India is not a control market. In Indonesia, we acquired a cereals and snack foods business from Godrej Consumer Products. They had made an acquisition and this part of the business was non-core so they decided to sell it. In Malaysia, we bought CTOS Data Systems, the country’s largest credit bureau. The sellers were two guys who were 60 years old and their kids didn’t want to run the business so they wanted a way to exit but retain a 25% stake. Then there is Masterskill Education Group, a listed company that didn’t have a hands-on owner so it was drifting a bit. We together with another group took control.
Q: Why is Creador entering the Philippines now?
A: If you look at the Philippines today it is a very small market and not very active. We think there are some interesting characteristics that remind me of India in some senses in the 1990s. We want to do it in a low-risk way, so we have got one guy on the ground and we are mapping out things based on spaces we’ve invested in previously. This is a long-term commitment. We are being very tightly focused, looking at three sectors initially and creating opportunities by meeting with companies and pitching them ideas.
Q: You made a partial exit from Malaysia’s OldTown White Coffee in 2013 and a full exit from India’s Repco Home Finance in 2014. What is the third exit?
A: We recently made a partial exit from Cholamandalam Finance. It was a Fund I deal from 2011 and we got a 2.8x return, selling about one third of our holding in the company.
Q: Why have exits been so challenging in India, particularly on the public markets side?
A: It is possible to get exits as long as you are disciplined. The windows are quite narrow and what usually happens is people get carried away when markets are doing well and they try to hold things longer to get a better return. When markets are good you have everything behind you – strong growth and margins, high multiples, and the currency is in your favor. When markets clamp down you get hit across the board and that is why you get these 30-40% swings.
Q: How do you address currency risk?
A: There is no way to hedge because it’s quite expensive. What we have done historically is underwrite at very high levels – we shoot for returns of 25% or more. In Fund I we are running at a 21-22% IRR in US dollar terms, while our local currency returns are more like 31-32%. That has given us the buffer to deal with currency issues.