Welcome to our ‘Fund in Focus’ series where we profile our member funds, underscore their investment philosophy, and highlight some of their interesting work. In this feature, Saurabh Jhalaria of InCred Alternative Investments talks about InCred's investment philosophy and risk management strategies behind their Credit Opportunities Fund. The interview explores investment criteria, successful case studies, capital deployment plans, and the fund's adaptability to India's economic opportunities. Additionally, it highlights transparent communication mechanisms, ensuring stakeholders are well-informed about the fund's performance.
FUND IN FOCUS: Navigating Risks: A Deep Dive into InCred Alternative Investments' Robust Risk Management Approach
1. What is the investment philosophy and strategy of the Fund?
The InCred Credit Opportunities Fund – I (ICOF-I) is built with a firm conviction in the potential of emerging and mid-market corporates in India. These corporates often face a shortage of debt capital from traditional sources, relying mainly on equity capital for funding. Our objective is to bridge this gap by identifying lucrative opportunities.
ICOF-I offers debt capital to companies that demonstrate rapid growth, possess a sound governance structure, and exhibit profitability. The fund typically supports various use cases, such as working capital and capital expenditure requirements of emerging and mid-market Indian corporates.
2. How does InCred Alternative Investments approach risk management in its investment process?
Risk management for ICOF can be categorized into two phases: pre-investment and post-investment. During the pre-investment phase, we independently conduct thorough due diligence on the company and its promoters. Whenever possible, we utilize the borrowers' historical credit performance track record or any other relevant behavioural aspects from the InCred group's ecosystem to enhance our diligence process. Our investment strategy focuses on institutionally owned corporates with robust governance structures. Regarding structuring, we prioritize minimum or zero moratoriums and mandate amortizing structures to mitigate repayment risk. Moving on to the post-investment phase, we receive monthly management information system (MIS) reports and business updates from all our portfolio companies. Additionally, we hold regular portfolio management committee meetings with independent members who closely monitor any early warning signals in our investments.
3. What specific criteria do you look for when considering potential investments or partners?
Our investment preferences are tailored to specific sectors that we favour and avoid. We steer clear of infrastructure and real estate, instead focusing on industries such as BFSI, Consumer, Healthcare, B2B, manufacturing, and industrials. Our criteria for investment include seeking out companies with quality founders or established institutional holdings. We prioritize businesses that have already established a product market fit and are seeking to accelerate their growth trajectory.
4. Can you share some examples of successful investments that showcase your expertise?
Last year, we invested in one of India's most extensive and rapidly expanding consumer brands in the fashion jewellery industry. The investment met all the criteria for growth, corporate governance, strategy, and sector. Our investment has proven to be highly beneficial for us. The company has grown almost twice since we invested and has reinforced its omnichannel presence by doubling its offline presence, a decision we strongly supported and made.
5. InCred recently closed the ICOF - I strategy, Tell us how the fund is planning to deploy the capital and investments done so far.
In October 2023, we successfully concluded the final closing of our first fund. Our initial closing took place in November 2022, and since then, we have efficiently utilized nearly 90% of our invested capital. With a total of 23 investments made from ICOF - I, we have built a well-diversified and detailed portfolio.
6. How does the fund plan to capitalise on the ‘India opportunity’, and how is it positioned to adapt to changes?
India is strategically positioned to experience significant economic growth and increased consumption. The capital expenditure cycle is on an upward trajectory, and there is a positive trend in manufacturing utilization. Indian corporates have witnessed a rebound in earnings and are on a healthy trajectory. It is worth noting that a substantial portion of capital for the growth of these corporates is sourced from equity, such as private equity (PE), venture capital (VC), or initial public offerings (IPO). However, there exists a gap between the supply and demand of credit for this segment of corporates, and ICOF has successfully capitalized on this opportunity. We remain optimistic about the potential in India and are open to exploring additional sectors or corporates with varying profitability or scale as long as the opportunity aligns with our objectives.
7. What communication and reporting mechanisms are in place to keep stakeholders informed about the fund's performance?
Our investors are provided with a detailed monthly report regarding the progress of their investment in the Fund. Furthermore, we also provide quarterly updates to our investors, showcasing the current performance of all investments and providing a detailed overview of the new investments made in the previous quarter. To ensure transparency, we organize regular investor webinars to discuss our strategy and present the current portfolio performance. These webinars serve as a platform for interaction with our investors, allowing us to address their specific queries and foster a collaborative environment.