Struck by Byju’s, General Atlantic’s India ship is in distress. Will it survive?

This put General Atlantic, a global private-equity fund with $83 billion in assets under management, in a quandary—to invest more or refuse.

Byju’s, run by its charismatic founder Byju Raveendran, has been struggling with bleeding acquisitions, governance slip-ups and lawsuits filed by investors. General Atlantic first invested in the edtech company in 2018 and then topped up its investments in subsequent funding rounds to maintain its stake of about 6%. Overall, its investment in the company today total $380 million. The investments were made at various valuations but its cost averaged at a valuation of under $3 billion, investors Mint spoke to said.

The rights issue, however, was dirt cheap. Byju’s was only valuing itself at $20 million to raise $200 million, and General Atlantic had to pump in only about $12 million to maintain its stake.

“The question was whether it will be akin to throwing good money behind bad,” said a person familiar with the PE firm’s thinking in India. He didn’t want to be identified.

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General Atlantic’s senior India executives, Sandeep Naik and Shantanu Rastogi, would have debated this over and over again. Investing at this throwaway valuation would have cut its losses. But a primary concern was that investors in Byju’s have little to no rights in share purchase agreements. Raveendran is one of the smartest dealmakers in India’s thriving startup universe and he has learnt from the experiences of entrepreneurs who lost control of their companies because they gave away way too much stake too early. Think of Sachin and Binny Bansal of Flipkart. By the time Walmart acquired the e-commerce company in 2018, the duo held around 5% stake each. Raveendran, as of now, holds over a fifth of his company—22%. Investors in Byju’s have little say on corporate strategy, forget board control. General Atlantic finally decided not to invest without securing more rights—say over management control and visibility on the use of proceeds.

The question was whether it will be akin to throwing good money behind bad

But that choice has punched a hole in its India ship, a country where it has invested $5.1 billion since the late 1990s. The firm’s $380 million investment in the edtech firm—one of its larger bets in India—may turn to dust. Why is that? Since Byju’s was issuing a lot of shares at a very low price, General Atlantic’s non-participation means its stake is likely to get severely diluted.

The PE firm, and other investors, are digging in for a long stretched-out battle with the founders of Byju’s in the courts. Meanwhile, the development raises several questions. How deep is the hole in General Atlantic’s ship? Writing off nearly $400 million will surely be a hard bullet to bite and a blow it will take a long time to recover from. Can it stay afloat in the choppy sea? And how does it change the way it does business in India?

Shaky tech

Turns out, Byju’s is not the only investment that is shaky. A clutch of other businesses General Atlantic has invested in is either losing money or have shed value. In short, the payday is far away.

Other than Byju’s, the PE firm made a second edtech bet—it invested about $180 million in Unacademy, which was last valued at around $3.5 billion. Combined with Byju’s, General Atlantic’s Indian edtech exposure is about $560 million—which is over 10% of its total investment in India.

Unacademy isn’t in great shape. The company made a string of acquisitions between 2018 and 2022—about 13 of them—and launched a series of new products. Most of them are now dead, or are operating on the sidelines, Mint had reported on 22 February. Faced with a slowdown in online coaching, Unacademy has pivoted to offline classes, where it faces entrenched players such as Allen Career Institute and Aakash Educational Services.

General Atlantic also invested around $50 million in NoBroker, an online real estate platform. The company filed its 2021-22 financial statements in December 2023, after a 15-month delay. It reported a 63% jump in losses to ₹309 crore though its revenue also grew by 96% to ₹326 crore. The 2022-23 statements are not available on the Registrar of Companies.

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None of the two tech investments cited above are expected to be a write off—certainly not at the scale of Byju’s—but General Atlantic did have another stroke of bad luck, in October 2022. It invested in BillDesk, a payments gateway business, first in 2016. South African investor Prosus NV-backed PayU was in talks to acquire BillDesk for $4.7 billion but the deal was called off. Prosus scrapped the acquisition saying that deal conditions were unmet, though people familiar with the move told Mint at the time that it was because market conditions had changed. An exit here could have added a $700-800 million payday for General Atlantic.

BillDesk, meanwhile, lost the growth momentum as it was readying for the merger. The company is rebuilding its business and is aiming for a public listing over the next couple of years.

Investors put money to work when they think they can make returns in the shortest time possible. A delay in the exit timeline typically reduces the returns percentage from that investment. “It is clear that many of General Atlantic’s tech investments will take a longer time to yield results,” said an investment banker tracking the firm, who asked not to be identified.

Trouble in non-tech

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In the non-tech basket, General Atlantic is struggling with its investment in PNB Housing Finance.

Ahead of the housing finance company’s initial public offering (IPO) in 2016, the PE firm acquired shares at around ₹750-775 apiece. Thereafter, it doubled its investment in subsequent years, acquiring shares at a higher price from the open market. In 2018, it paid approximately ₹1,279 per share to acquire a tranche from Carlyle. In 2019, it paid around ₹850 per share, according to data platform VCCEdge.

However, PNB Housing Finance is trading lower now—on 1 March, its shares closed at 727.50 a piece.

Yet another star investment for General Atlantic is Rubicon Research, a pharmaceutical company. It acquired about 54% in Rubicon in 2019 for around $100 million. This investment, too, looks shaky. Rubicon reported double digit profits till March 2021. Thereafter, it has reported two consecutive years of losses—loss of ₹67.81 crore in 2021-22 and a loss of ₹16.89 crore last year, according to VCCEdge.

Rubicon reported double digit profits till March 2021. Thereafter, it has reported two consecutive years of losses.

“The company incurred losses mainly on account of expenses incurred towards the initial set-up cost and employee cost in Advagen Pharma Ltd, which is a newly formed company,” a Care Ratings report from 4 October 2023 stated. The report added that the group’s research and expenditure (R&D) expenditure had increased from 2018-19 to 2022-23.

“Furthermore, the group faces intense competition in the market with presence from the organized and unorganized players operating in the industry. Hence, the ability of the group to continuously upgrade the plant with all regulatory approvals in place remains critical,” the Care report stated about Rubicon.

“General Atlantic chose to invest a significant part of the company’s revenue back into R&D and that contributed to net losses,” said one person with knowledge of the firm’s thinking. He didn’t want to be identified either.

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The firm, meanwhile, dabbled in fashion, investing $50-60 million in House of Anita Dongre in November 2013. The fashion company reported losses over the preceding four years till 2021-22 though it reported a ₹40 lakh profit in 2022-23, according to VCCEdge.

The people cited above said that the women’s apparel company with its two brands—AND and Global Desi—is shifting out of the crowded affordable fashion market. This could help the company sustain profitability.

What worked

On the brighter side, General Atlantic has booked several profitable exits, especially over the past two-four years, which could balance out its loss-making bets. It exited Capital Foods, which sells noodles and sauces under the brand Ching’s Secret, at close to 2.5 times its initial investment, when the business was sold to Tata Consumer Products this January, two people cited above, with knowledge of the development, said.

General Atlantic also stands to make at least $750-775 million on its investment in depository and registry services company KFin Technologies, which it partly sold in December 2023. While it has booked $275 million out of its investment, its balance shares are worth over $500 million, the people cited above said. KFin Technologies could well turn out to be the PE firm’s star investment out of India. The firm also made $800 million by selling its stake in Kerala Institute of Medical Sciences and 360 One (previously IIFL Wealth), according to news website VCCircle. In addition, the firm exited data analytics business MuSigma, health tech firm CitiusTech and the National Stock Exchange between 2019-2022. The deals fetched handsome returns. “Most of these exits have returned 2.5X to 5X on investment,” one of the people cited above said.

Overall, in the past three-four years, General Atlantic would have made exits that total $2 billion. India, thereby, has been a lucrative market for the firm, notwithstanding its current troubles with the edtech portfolio. General Atlantic did not respond to Mint’s questions on the company’s investments, exits and their specific value.

Learning from Byju’s

This brings us back to how General Atlantic’s India strategy is likely to shape up, going forward. One thing is clear. After the Byju’s episode, the PE firm will seek to invest in companies where it is able to exert a greater influence. It has also invested nearly $1 billion in two Reliance entities—Jio Platforms and Reliance Retail Ventures—for a fraction of a stake. While most investors view investments in Reliance entities as safe, it is unlikely they can influence the group’s strategy.

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“The firm wants to do larger deals than what it has done in the past and deals where it has higher influence,” one of the persons cited above said.

This would mean taking up 30-80% stake in investments, starting with $100 million deals. Over time, the firm can invest up to $350 million. Typically, investors take this approach so that they are able to monitor growth over time. This is exactly what General Atlantic did with Byju’s too. But from now on, portfolio companies can expect more due diligence.

In addition, General Atlantic will concentrate more on capital efficient companies, the people quoted above said. This would mean eschewing companies that are raising a lot of capital without any clarity on the use of proceeds.

The firm wants to do larger deals than what it has done in the past and deals where it has higher influence.

Still bullish?

Will the Byju’s experience change the nature of its relationship with startup founders?

We hear the PE firm still wants to be founder-friendly. In fact, the company has supported founders going through turmoil in the past. CitiusTech is an example.

General Atlantic invested in Citius in 2013 and subsequently sold its stake to Baring Private Equity Asia in 2018. Rizwan Koita, co-founder of CitiusTech, told Mint that the PE firm was always supportive. “During the period when General Atlantic was invested, there was a 18 months lull when the business did not grow as per targets. General Atlantic was very involved and helped us figure things out,” he said.

The other question: will the recent spate of bad runs switch the firm off the tech sector? Apart from edtech, the firm has made bets on fintech, healthtech and software-as-a-service companies.

A General Atlantic spokesperson told Mint it remains bullish on tech and tech services. “As long-term investors in India, the digitization of every sector—including telecom, healthcare, and financial services, among others—has long been, and will continue to remain, a consistent theme in our investment approach as entrepreneurs focus on addressing the needs of the local population and expanding access to key goods and services,” the spokesperson said.

In India, the firm has undergone a leadership change in the last two years. After leading the firm’s investment thesis in India and south east Asia, Sandeep Naik, the face of the company in India for long, is now mostly building the PE firm’s south east Asian portfolio.

This leaves Shantanu Rastogi, a more media shy investment professional, with the task of shaping the firm’s investment thesis in India.

We got a glimpse of his thinking during the recent Mumbai Tech Week. On 18 February, a Sunday, Rastogi was part of a discussion rather positively titled ‘Startup winter: The ice begins to melt’. He came dressed in casuals.

What would he have done differently while making technology investments in India, he was asked.

“Invested more,” he replied.