Exclusive: PE firm Lighthouse Funds aims to launch new $200m fund by year end

Having raised $235 million across its last two funds, Mumbai-based private equity firm Lighthouse Funds is gearing up to launch its largest fund yet in the next few months.

Mukund Krishnaswami, Founding Partner, Lighthouse Funds

Founded by Mukund Krishnaswami and Sean Sovak, Lighthouse launched its first India-focused investment vehicle — India 2020, Limited (“Fund I”) — with a corpus of approximately $100 million in 2008. This was followed by the $135 million India 2020 Fund II, Limited in 2014.

With around 18 investments in its portfolio such as Fab India, Bikaji Foods and Kama Ayurveda and some rewarding exits including Dhanuka Agritech Ltd, Unibic Foods and Suraksha Diagnostics, the consumer brands-focused Lighthouseis nearing full deployment of its second fund.

In an interview with DEALSTREETASIA, Mukund Krishnaswami, founding partner of Lighthouse, talks about the upcoming fund and the current investment ecosystem. Edited excerpts:

How do you view the current investment climate?

Both funds and entrepreneurs are more mature now. About 10 years ago, the private equity market in India was a little immature. On the investors side, people are more experienced, more mature and they have gone through a cycle. You now have serious players from an investors’ stand point; they’re not competing against other funds. In 2007-08, the problem was that you had a lot of these players that hadn’t done this before and they would make investments at valuations that were unreasonable, and that’s what drove the entire market out. A lot of that has subsided. That’s very positive. On the companies’ side too, you have far more seasoned entrepreneurs. Ten years ago, they hadn’t any trend other than in the market, they had only seen growth and didn’t know how to run a business when there is no growth or when the markets are down. And now because entrepreneurs have been through that hard time, they are looking for capital providers that can help them navigate.

You had plans for a $200 million fund. What is the status of that right now?

We haven’t launched it yet, but we plan to do it this year. There is a lot of interest in general in the country. The nature of our business is that those who have performed and returned significant money to their investors tend to see capital come back. We will be talking to existing investors and seeking their support. We’ll see how the market is but we’re optimistic.

How much of your second fund is already deployed?

We’re significantly deployed. We have capital for another couple of deals from our second fund. Certainly by the end of the year, we will be launching the new fund.

Any sectors that you might be keen on investing in?

We are largely focused on consumer products. That’s a story we see playing out in the next few years. I don’t think we will be looking at real estate or infrastructure or other capex-heavy stuff. We might examine these, but if we look at our experience and the people that we have, it’s not really aligned to sectors like that. Also, we haven’t done much in healthcare or technology, which could be areas that we look at. However, this won’t be traditional tech. There are the Sequoias and the Nexus of the world who do this far better than we could.

We’re now also seeing more funds turning their attention to the consumer products space. How do you view competition now?

You have to segment the funds market. If you look at venture guys like us who are sub-$200 million, then there are late-stage investors and there are early stage investors like Fireside and DSG. If you look at our space, which is the $10-20 million space, there just aren’t that many people. The moment it starts getting crowded, we will probably think of doing something else. As an investor, it’s not worth the time in an overly competitive markets.

However, there is plenty of opportunity right now in the consumer brands space. In a country of this size, there are not a lot of consumer brands, so there is a massive opportunity to create them. We won’t do a lot of early stage because there is a lot of volatility in that kind of portfolio.

Is a separate early-stage fund something that you might consider?

We're not shy to back one or two early stage companies. We have invested in a company called Kama Ayurveda that makes personal care products. When we backed the company, it was a less than Rs 15 crore business. They have now grown their store presence from three stores to 30 stores in a matter of a few years. If it’s the right business model, we don’t mind taking relatively early bets. Many times, early stage businesses can’t absorb a large amount of capital.

We also have to see a path for ourselves. If you’re managing a $200 million fund, you can’t be writing a $2 million cheque. Even if you make 10x on it, it doesn’t make much sense. You have to find a way to underwrite it in a way that you can put in more capital. So we might do one or two but that won’t be our focus area.

With the new fund, will you be looking at bigger cheques?

In our minds, we’re looking at doing up to Rs 150 crore or $25 million. I don’t think we’ll go much beyond that. The moment you go beyond that, there are bigger $300-500 million funds that can write those cheques. So, we’ll stay where we are. The big mistake that funds do is they go beyond what they are good at and the results are seldom very good. Last year, we saw about 350 opportunities, so there’s no lack of opportunities.

So the plan with the new fund would be to invest in more companies rather than cutting bigger cheques?

The cheque sizes will be marginally bigger. In our first fund, our typical deals were between $7-10 million and in our second fund, $12-15 million. So for the third fund, it is likely to be around $14-18 million.

Is there going to be any change in the deployment strategy for your third fund?

I don’t think there’s going to be any change in any material way for the third fund. Consistency matters. I think it’s going to be more of the same as we look at it. We are going to get more and more precise in the things that we do on the consumer side.

Do you think you could also pick up pace in the number of deployments that you do?

While deploying a fund, managing the pace of your investments is a fool’s errand. If we find 10 great opportunities, then we’ll do 10 investments and if we find nothing for three years, then we’ll do nothing for three years. The moment there is pressure to deploy, bad deals get done. So, it’s very important for a fund to maintain that discipline. I think there are some fabulous opportunities right now. Some of the things I’m seeing now are the best that I’ve seen in 10 years.

What has your experience been with exits?

To get exits you have to invest in exitable businesses. Part of the reason the industry hasn’t seen many exits is that a lot of investments went into capex-heavy companies, especially in the 2007-09 period. That money is never going to come back. If you keep that part out, then the exits have been okay. One of the things that we’ve got right is that we have backed entrepreneurs who genuinely wanted exits. When I’m talking about exits, it’s not only about IPOs. A lot of our exits have been with entrepreneurs who are willing to give up control or sell the company and we’re just along for the ride.

How has 2017 been for you so far, and what does the next one year look like for Lighthouse?

For us, both 2016 and 2017 have been good years. In 2016, we had four major exits and in 2017, we have made two investments and the pipeline is quite strong. Broadly, we’re quite pleased with the way we have come along as an organisation and the way we have developed.

(As published in DEALSTREETASIA on Fri, July 28 2017. )