“I made a wrong choice. My clock has wound back 13 years,” says M Mahadevan, the seasoned restaurateur from Chennai.

“When I saw it wasn’t going anywhere,” he continues, “I shouldn’t have waited for [my] 50% [shareholding] to go down to 30%.”

Mahadevan’s referring to the 11 years of private equity (PE) investment that he lived with when Peepul Capital put money in his two-decade-old restaurant business, Oriental Cuisines. When Peepul came knocking in 2007, Mahadevan had chosen to become a non-resident Indian, ready to roll out 11 restaurant projects internationally. In Peepul’s “zero-interest” capital he saw an opportunity to grow. A decade later, one which saw him diluting his stake in order to keep the business running, he managed to vertically split Oriental.

In August 2018, Mahadevan clawed back the fine dining business; Peepul Capital walked away with bakery and quick service restaurants, which were, in general, scalable and more amenable to PE management.

Peepul Capital’s management is rather unusual. While it considers itself ‘growth-oriented private equity’, it mostly makes venture capitalist-like deals and behaves like a buyout fund once inside the company. It comes in early, picks up majority stakes—usually between 70-80% or more—side-tracks the founder, and tries to run the company. Sandeep Reddy, the non-resident Indian fund manager of Peepul, has been testing this model across three funds where he raised over $700 million.

“The approach of a buyout fund, where the business is paramount and the founders are incidental, is a compelling story for the Limited Partners (LPs) for sure. It’s like taking control of your destiny is part of the strategy, and the fund has stayed close to that thesis,” says a former Peepul investment manager who recently quit the fund.

Founders, of course, don’t like to yield control. Especially when she believes the investor’s Plan B isn’t better than her Plan A. For Mahadevan, taking control of his destiny meant a knock of Rs 22 crore ($2.9 million), his “30 years of savings” gone in a cascade of whooshes, thanks to his personal guarantees to the bank. When Peepul came onboard, Oriental was a ~Rs 25-crore business. With a 50% stake, Mahadevan opted to become an investor to focus on the international business. The India operations were left to Peepul, which grew the business to over Rs 100 crore ($13.5 million).

However, there was a problem. Bottom line.

“You know what they say: topline is vanity, bottom line is sanity,” says Mahadevan. Four CEOs in 10 years couldn’t build the business for an exit. “Nobody wanted to buy it…for me, it was a question of saving nearly 2,000 jobs.”

The fine dining business, including the popular The Marina chain of restaurants, is finally nearing breakeven. Thirteen years too late?

The clock has wound back or been stuck for many portfolio companies at Peepul. While hits and misses are common in private equity investment, there’s a pattern in Peepul’s share of misses.

AUTHOR

Seema Singh

Seema has over two decades of experience in journalism. Before starting The Ken, Seema wrote “Myth Breaker: Kiran Mazumdar-Shaw and the Story of Indian Biotech”, published by HarperCollins in May 2016. Prior to that, she was a senior editor and bureau chief for Bangalore with Forbes India, and before that she wrote for Mint. Seema has written for numerous international publications like IEEE-Spectrum, New Scientist, Cell and Newsweek. Seema is a Knight Science Journalism Fellow from the Massachusetts Institute of Technology and a MacArthur Foundation Research Grantee.

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