Welcome to our ‘Fund in Focus’ series where we profile our member funds, underscore their investment philosophy, and highlight some of their interesting work. Today we speak to Rahul Agarwal, Managing Director, Quadria Capital. In this feature, Rahul shares the investment thesis of the fund while also highlighting why India is a core market attracting maximum investment allocation. With strong focus on mid to late-stage stage companies, read on to know the fund’s investment strategy for the sub-segments in healthcare.
Raising the Bar: Quadria Capital's Evolution in Fundraising and Investor Relations
1. While describing Quadria Capital’s investment philosophy, do also share insight into the fund’s portfolio construction.
Quadria Capital adopts a fundamentals and value driven investment approach, which is rooted in deep domain knowledge built over years of on-the-ground experience in the healthcare sector in Asia. Quadria’s investment strategy is focused on four key pillars: (a) Invest in What We Understand, (b) Invest by Adding Tangible Value, (c) Focused Investment Strike Zone and (d) Clear Pathway to Value Maximization. The Firm’s investment philosophy is to invest in healthcare businesses with stable and strong cash flows as well as competitively advantaged business models that exhibit substantial growth prospects and potential to emerge as regional leaders in the fast-growing Asian markets. In addition to providing strategic growth capital, Quadria works closely with its portfolio companies to drive tangible value creation, thus establishing a clear pathway towards shareholder value maximization at exit.
Quadria seeks to create optimum risk return portfolio construct across all its funds. Portfolio construction is guided by (a) balanced allocation between South and Southeast Asia, (b) diversification across attractive healthcare sub-segments, and (c) diversification across different vintage years.
2. Quadria Capital has successfully raised multiple funds. What has been the key to your fundraising success, and how has your investor base evolved over time?
Over the years, Quadria has focused on building a strong relationship with its investors and gained their trust and confidence via (a) consistently deploying its stated investment strategy across multiple funds, (b) retaining and nurturing the best talent in Asian healthcare, (c) consistently delivering strong returns and distributions back to investors, (d) high quality and transparent reporting and (e) high co-investment allocation.
Quadria is supported by some of the world’s marquee investors including leading asset managers/ fund of funds, DFIs and impact investors, pension and other institutional investors, family offices and healthcare strategics. Quadria has been successful in maintaining a high re-up rate with existing investors and adding new ones with each subsequent fund.
3. What is the fund’s approach when investing into the Indian market? As a global fund do you see any lines of similarities with other regions?
India is a core market for Quadria and receives the maximum country investment allocation from Quadria funds. We have a large office with on-the-ground investment and operating partners team. Quadria deploys the same investment style and strategy across all markets. The healthcare growth levers and challenges across India and Southeast Asian markets are strikingly similar. In fact, the stark similarity provides us an opportunity to get our portfolio companies from both the regions to collaborate and work with each other – something unique that only a regional fund like Quadria can offer. Quadria has helped stich multiple mutually beneficial business partnerships between its portfolio companies within India and Southeast Asia.
4. Enterprises globally are working towards making sustainability an integral part of their DNA. What in your opinion are the benchmarks for measuring the impact generated by ESG focused enterprises? Any change in the attitude and mandate of LPs with respect to ESG compliance over the years?
Quadria Capital believes that responsible and impact-oriented investing is critical to long term, sustainable value creation and it is proud to invest in businesses that are proactively working to address the pressing challenges around healthcare provisioning and comply with best global ESG practices. The practices around measuring and reporting ESG and social impact performance are still evolving globally, and more so in our region. We have taken a step forward to develop a proprietary impact measurement and reporting framework, which helps assess investments based on their potential to generate positive change for the health system across four key impact pillars: Access, Affordability, Quality, and Awareness.
In addition to potential financial returns, our investment committee evaluates each investment based on (a) its impact score at time of investment and proposed exit and (b) findings of ESG due-diligence and proposed corrective action plan. After the investment, our ESG and impact team works diligently with each portfolio company to achieve those improvements to ensure they score high on regulatory/ customer audits and buyer due-diligence at time of IPO/ exit process.
Our ESG and impact framework and performance is very robust, and we score high on DFI and impact LP assessments, leading to very high re-up commitments from such LPs in all our funds.
5. Quadria Capital has been known for its focus on healthcare and pharma investments. How does Quadria approach deal sourcing and due diligence to identify potential investment targets in the healthcare industry?
Quadria Capital's deep-rooted domain knowledge and entrenched relationships within the region and the sector enable it to access the highest quality, proprietary deal flow across its target healthcare subsectors. Quadria's substantial prior experience of value creation is a fundamental reason that entrepreneurs choose to partner with us. In building its proprietary pipeline, Quadria Capital uses a fundamental-driven approach by conducting a comprehensive analysis of the entire healthcare universe in our target region to identify potential leaders, and then build a long term relationship and mutual trust and confidence with these companies, even when there is no imminent deal. As a result, over 75% of deals completed by the Quadria Funds have been proprietary/ exclusive in nature.
6. Apart from traditional healthcare related investments (Hospitals, API, Pharma), which are the other upcoming areas the fund anticipates growth in investment?
Quadria’s investment strategy is to primarily invest in mid to late growth stage companies, which are scaled up, profitable and have stable cash flows. We are seeing a strong trend of such companies emerging in many healthcare sub-segments, outside of the traditional segments. Some of these high growth sub-segments are medical device/ consumables, contract research/ manufacturing businesses, consumer healthcare and technology driven healthcare models, amongst others. We evaluate opportunities in all attractive healthcare sub-segments and try to pick the best investments based on our internal criteria.
7. The healthcare sector can be complex and heavily regulated. How does Quadria navigate the regulatory landscape while ensuring sustainable growth for its portfolio companies?
Quadria approaches regulatory risk management meticulously at various levels. We stay away from healthcare sub-segments which have existing or potential regulatory headwinds or risks which represent unsurmountable binary risks. For usual course management of regulatory compliances, we do a detailed legal and ESG due diligence before investing and make sure any identified deficiencies are corrected before our investment or there is a legally binding agreement to correct those after our investment. During the investment period, our deal and ESG teams monitor regulatory compliances via regular discussions and Ex-co/ Board level reporting for each portfolio company. We believe instilling a culture of discipline and risk monitoring helps tide over such risks effectively.
8. Could you share some examples of successful portfolio companies that Quadria has supported and the value-add provided by the firm to help these companies thrive?
Quadria Capital’s in-depth understanding of healthcare, operational know-how, and proprietary healthcare ecosystem ensures a compelling hands-on value add proposition to our portfolio companies. We have been able to consistently demonstrate our value-add in our past and current investments. Couple of specific examples:
In one of our Indian hospital investments, the founder doctors were building a 3x capacity $100m capex hospital but had no experience or team to manage such a large greenfield project. Quadria seconded one of its team member to join the hospital team for two years, and led the project management, equipment procurement and hiring of key CXOs. Quadria’s intervention was critical in commissioning the project on time and the new hospital was EBITDA positive within a year,
In one of our Indian pharma investments, founders had run the business as a family run enterprise and now wanted to professionalize the team and operations. Quadria leveraged its network to (a) identify and hire 7 CXOs across business units and (b) put in place a system for monthly MIS review with individual business unit heads to develop key initiatives as well as strategic plans, especially on product portfolio selection and go-to-market strategy for key business units. Quadria also helped the company backward integrate by identifying and helping execute a synergistic acquisition.
9. In today's competitive investment landscape, how does Quadria differentiate itself and maintain a strong track record of successful exits and returns for its investors?
Quadria’s key competitive strengths and differentiators are (a) one of Asia’s largest healthcare-focused investment and value creation team with deep domain knowledge and experience, that can help effectively source, evaluate and execute high quality transactions, (b) consistent application of fundamentals and value creation driven approach, which is rooted in deep domain knowledge built over years of on-the-ground experience in the healthcare sector and (c) deep track record of navigating the entire life cycle of private equity investments – from investment to value creation to exits. Preserving and utilizing these key strengths to make high quality investments, add value, create profitable exits and make consistent distributions to its LPs, have been the key reasons for Quadria’s growth and success in raising largest successive funds.
10. Maintaining a transparent and collaborative relationship with LPs are crucial. What are some of the best practices which Quadria Capital follows throughout the investment lifecycle?
Since inception, Quadria has maintained a very strong engagement and relationship with its LPs. Quadria takes a very collaborative partnership approach by identifying each LP’s investment objective and unique requirements, and then diligently attempts to fulfil those requirements, be it co-investments, ESG/ impact compliances or other strategic needs. For example, till date Quadria has completed 18 co-investment transactions with 13 LPs, which has helped LPs fulfil dual objectives of targeted capital deployment and accelerated returns. This collaborative partnership approach is the key success factor for Quadria raising successive larger funds with high re-up commitments from its LPs.