Speaking to CNBC-TV18, Sankararaman emphasised that Multiples operates with a five-to-seven-year investment horizon, making near-term market corrections less impactful on their core theses. In fact, he views the current environment, where capital markets are less accessible for early-stage companies compared to the last couple of years, as advantageous for private equity. “I would say this is a great year for private equity… I would expect to see a lot more action on the private side,” he stated.
Multiples made an early bet on India’s technology sector nearly 12 years ago, identifying the significant value creation potential in “new-age businesses.” Sankararaman noted that the approximately 20 listed new-economy businesses currently represent about $100 billion, or 3.5% of India’s total market capitalisation. “The way I see it, over the next 10 years, this will be 15 to 20% of the market cap,” he predicted.
Looking ahead, Sankararaman identified key shifts shaping Multiples’ investment focus for the next five to seven years. Firstly, a notable change in consumer behaviour is the growing willingness to pay for subscriptions. Citing examples like streaming platforms (Sony Liv) and delivery fees for quick commerce, he observed, “There’s a rise in subscription-led businesses, which naturally comes with affluence. That’s one large opportunity.”
Secondly, Multiples sees significant potential in catering to “India B.” Sankararaman clarified this isn’t just about tier-2 or tier-3 cities like Gorakhpur, but also includes lower-income segments within major metropolitan areas, like Mumbai’s Govandi. “The products and services for India B will be different than those for India A,” he explained, highlighting that this demographic is just beginning its discretionary spending journey.
Below is the verbatim transcript of the interview.
Q: The first time you said that you back companies which have consumer love or brand love. Since then to now, sentiment has changed. Things have gotten a lot cheaper or a lot worse when it comes to growth, whichever way you cut it. What are the current challenges, opportunities, and the valuation environment? How are you looking at all of this from your lens?
Sankararaman: We are looking to take bets that are fairly long term, 5 to 7-year bets. So, the near term doesn’t change our long-term theses in any significant way. I would say this is a great year for private equity because, in the last couple of years, capital markets were a real option even for companies that were not really ready for an IPO. But now, given that things have corrected, I would expect to see a lot more action on the private side.
Just to quickly comment on the companies that you mentioned, the one common theme you will see is that they are all new-age businesses. At Multiples, we took a very early call to invest in technology about 12 years ago, and our underlying theme was that there would be a lot of value created by new-age businesses. If you think about the listed ones today, new economy businesses, there are about 20 of them listed with a market cap of $100 billion. That’s about 3.5% of our overall market cap.
The way I see it, over the next 10 years, this will be 15 to 20% of the market cap. So, there’s a large value to be created by tech businesses. We were the first private equity fund to start investing in tech businesses 10 years ago. That’s something we will continue to do.
We’ve invested maybe about $400 million in these companies, already taken out more than a billion, and that’s only with exits from three or four of them. So, we see huge potential here. These are the kinds of companies we want to continue to back.
Q: You mentioned you take a five to seven-year view. Where is that next five to seven-year opportunity that you are finding?
Sankararaman: Two, three things are changing. One is, for the first time, we’re seeing that consumers are becoming a lot more open to paying for subscriptions in India. For the longest time, we heard that people weren’t willing to pay for subscriptions. But if you look at the numbers, even for platforms like Sony Liv, what kind of subscription revenue they’re making, something is clearly changing. Quick commerce, most of us are paying for delivery now. Again, something is changing. There’s a rise in subscription-led businesses, which naturally comes with affluence. That’s one large opportunity.
The second large opportunity is India B. And when I say India B, I’m not talking about Gorakhpur alone, I’m also talking about Govandi. India B is also within our big cities. The products and services for India B will be different than those for India A. That’s again the next big opportunity, as they’ve just about started their discretionary consumption journey. So, those are two large areas on the consumption side.
In addition, on the B2B side, we are focusing on businesses that are not just buy-and-sell models, but where you can add value and create serious moats.
We basically look at opportunities in three buckets: One is, new-age businesses, about 10 investments we’ve made here, fairly successfully. These are tech-led. In India, you will continue to see such tech businesses either create new economic opportunities or disrupt existing ones. If you’re disrupting an existing market, your ability to grow faster than the market is much higher, which has clearly been our experience.
The second bucket is classic growth. And the third bucket is buyouts. We’re also seeing a lot of families, who earlier weren’t willing to sell their businesses, now becoming more open. In the last two years, we’ve evaluated about 20 buyout transactions. Just the fact that so many deals even came to us tells you that something is changing. Families are a lot more open to two things, one, professionalising management, and they believe they need a change agent for that. A private equity fund can be that agent. Second, the next generation is saying, “Papa, I may not necessarily want to run this business.” That’s a big shift, the idea that shareholder and manager can be different, which has always been the case in the West, is now beginning to happen in India. So those are the opportunities we’re seeing.
Q: You spoke about exits and how you have a five to seven-year view. Exits are now getting pushed down the road, becoming a little more difficult. How are you navigating through that? And the other point you raised, about people paying for convenience, so far, it’s been shown that the expected addressable market wasn’t as big as the actual addressable market. I wrote about this, saying we’re not a TAM market, we’re an ARM market. You have to look at the actual revenue market. So, what are your thoughts on that, and exits?
Sankararaman: We’ll take the exit question first. There’s now a very vibrant PE-to-PE secondary market that has emerged. So, it’s not just capital markets as an exit window, but also private equity to private equity. The amount of dry powder in the country is fairly substantial. So, there’s a lot of action there as far as exits are concerned.
Also, strategic exits, there are companies owned by PE funds that are being bought by strategic businesses.
On your TAM vs ARM question, it’s a very valid point. We are really looking at businesses where there is a visible, serviceable addressable market. We’re not taking bets where you have to believe that something will happen, we already have indications.
Let me give you an example. When we invested in Delhivery, e-commerce was picking up. We looked at a lot of front-end e-com businesses but could never build conviction on who would make money and how. Our thesis was: the guy delivering the parcel wins, regardless of who’s winning at the front. At that time, Delhivery was making money on a per-parcel basis, even though, overall they were loss making. But, the opportunity and the macro were visible, and that was the call, to back the path to profitability.
Q: You have made your money in Delhivery, shareholders haven’t. If you look at the IPO price, the post-listing high to now, even now, there is so much supply in the market. Fundamentals haven’t kept pace with other parts of the market. That’s what I wanted to understand. Good on your fund for exiting at a good multiple. But when you speak about the listed space, and new age businesses turning from 3.5% to 10-15%, are there any opportunities in the listed space that offer that kind of upside potential? Because for a retail investor, they don’t get access to these deals before they go public.
Sankararaman: We don’t do public investments. We are largely focused on the private side. Our return expectations are, of course, very different from public market investments.
So, I won’t be able to give you a prognosis on which stocks to track. But I would say there is enough proof of concept of people making money in tech-led businesses on the private side. It’s all about the stage at which you invest in, and if you hold businesses for fairly long periods of time – Zomato is a great case in point. They’re now close to a $20 billion business. I think three things really matter: Is the founder agile? Because businesses are being built and disrupted very quickly. The concept of “built to last” is being challenged every day. Second is, are they operating in a market with a strong profit pool? And the third is, is there a clear path to profitability?
If these three fundamentals are in place, I don’t see why value won’t get created over long periods of time.
Q: With the recent shift in market sentiment over the last six or seven months, has there been any asset you were looking at earlier that has now become more reasonable, and are you eyeing those now?
Sankararaman: Absolutely. There are at least a couple of opportunities we’re looking at where the expectations of both the founder and the incumbent investors have become a lot more realistic. The bid-ask spread has kind of reduced.
I’ll give you an example. On the consumer side, over the last two years, the number of deals we looked at versus the number that got done, only a third actually closed. That was because A) the growth didn’t come, and B) the bid-ask spread was very, very high.
That is something I see likely changing in the next few quarters.
