Expansion, fund raising consolidate co-working space; PE deals set to grow

Traction in fund raising from PE deals in the co-working space has been such that from $4 million of deals in 2016, PE deals in the year-to-date in 2018 have been over $40 million

The co-working space has begun seeing consolidation, with players such as GoWork, AltF CoWorking and One Co.Work having already acquired or in the process of acquisition of smaller players. Companies are targeting expansion across geographies, and raising funds given the industry is capital intensive.

The consolidation, along with projected expansion to other tier-1 and tier-2 cities, is also set to boost private equity (PE) deals in the sector.

For instance, GoWork is in the process of raising $200 million for acquisition and expansion activities over the next couple of quarters. From a current 3.1 million sq ft of managing co-working space, GoWork is looking to ramp up to 30 million sq ft by 2020. 

For this, it plans to enter markets like Mumbai, Bengaluru and Hyderabad by 2019, which would be fueled by acquisitions.

“We are in talks to raise $200 million in the next 3 months. Cumulatively, we aim to manage 50,000-60,000 seats (conservatively) by FY20 or even 100,000 seats (aggressively). We are evaluating Bengaluru and Mumbai for acquisition. The kind of business model we have needs 50,000 sq ft at least, and we are looking at players in the same domain,” said Sudeep Singh, Chief Evangelist and Chief Executive of GoWork.

Players like One Co.Work are using acquisitions to enter new markets, apart from strengthening presence in existing regions. Having acquired IShareSpace, One Co.Work gained access to newer markets like Chennai and Mumbai, apart from adding seats in Delhi, Gurugram and Bengaluru. 

According to Bipin Taneja, General Manager of One Co.Work, which rose from managing 750 seats to 1,400, the acquisition was done to post a strong top line ahead of fund raising.

“We want to get into the first round of funding in Q2 of 2019 worth Rs 1 billion. However, it is very important to have strong top line and for that we chose to do acquisitions so that the number of seats and cities covered increased for better valuation,” Taneja told Business Standard.

AltF CoWorking, which has already acquired Daftar India in Noida, is planning to take the inorganic route again, depending on the business model and player. 

“Consolidation becomes a task, unless you find the right product and brand value. Each and every player has applied their own mindset and ethics into the products and hence, merger of products becomes difficult. We are mostly looking at organic growth but down the line, there will be inorganic growth too,” said Sarthak Chhabra, co-founder of AltF CoWorking, adding that the company had to rework the business model of its past acquisition. 

“We had to work a lot and invest quite an amount to rebuild it with AltF standards and model.” Simultaneously, the company is planning to raise funds in the next couple of quarters to fuel addition of 15-20 properties over a year and a half, and an additional 20-25 properties in couple of years to the current pool of 8-10 properties.

Given that gross profit margins run in the range of 20-25 per cent at times, co-working firms believe the industry will increasingly attract more private equity (PE) players.  

“A large number of PE players want to invest (in co-working space) because, first, they get access to real estate, which they understand; and second, a lot of these Chinese PE players seek to get into this space in India given development in China has led to high ROI in realty there. Tier-1 and tier-2 cities are expanding, therefore a lot of traction from international PE players is visible," Singh added.

Traction in fund raising from PE deals in the co-working space has been such that from $4 million of deals in 2016, PE deals in the year-to-date (YTD) in 2018 have been over $40 million, growing 10 times, according to Venture Intelligence. 

Meanwhile, companies are taking time to build occupancy rates before further expansion. “We are trying to take the Chennai centre, acquired from IShareSpace, from the current 70 per cent occupancy level to 90 per cent, before planning expansion,” Taneja added.