Big fish enter the PE pond
Sometime in early 2009, Bharat Banka, the newly appointed CEO of the Aditya Birla Group's latest financial services venture, Aditya Birla Capital Advisors, was huddled in a meeting with group Chairman Kumar Mangalam Birla at the central Mumbai headquarters. Also present were CEO of the financial services group, Ajay Srinivasan, along with the core team of the recently set-up private equity (PE) business. The 40-yearold Banka, who has been with the group for 15 years, began making a presentation to the Chairman on the proposed game plan for the PE venture.
THE STRATEGIC BENEFITS
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The big question was how much was Birla willing to commit to the venture as its sponsor. As he lingered on the last slide, the 42-year-old chief of the $28- billion diversified group said something that came like music to Banka's ears. "If I have to pick a number, I would want it (the sponsor's contribution) to be 20 per cent," announced the Chairman.
Banka heaved a sigh of relief. After all, 20 per cent is as good as it gets and is considered aggressive for a sponsor's contribution to a third-party PE venture. Between 10 and 15 per cent is considered the norm. By taking his group's contribution to 20 per cent, Birla was showing confidence in the mint-new PE arm and its team as well as in the potential that exists in the business for large conglomerates like the Aditya Birla Group.
BHARAT BANKA, MD & CEO, Aditya Birla Capital Advisors "We prefer a board representation. That brings discipline into the investee company"
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The Tatas, the Mahindras, and Anil Ambani's Reliance ADA Group are three other conglomerates that have outlined plans to fund attractive business propositions that are at the start-up stage (via venture capital) as well as established models (via PE).
Like the Birlas, the Tatas, too- via their three-year-old financial services arm Tata Capital-have chosen the third-party avenue, where funds will be raised externally, with the sponsor (the corporate) pitching in with 10-15 per cent. The Mahindras have more of a venture capital (VC) model in mind, and will use internal funds to incubate start-ups as well as invest in promising early-stage businesses. Ambani, for his part, has a two-horse model, one taking the VC path and the other the PE road.
Another approach is that of the Malvinder and Shivinder Singh-owned Religare Enterprises, which has jointly ventured with a Mumbai-based independent investment advisory firm, Milestone Capital Advisors. The Singhs are, of course, sitting on a stash after cashing out of Ranbaxy in 2008 for a cool $2.4 billion.
RAJESH SINGHAL, Managing Partner, Milestone Religare Investment Advisors "The big positive for corporate-sponsored PE funds is that the knowledge of a diversified group can be utilised when investing in the companies"
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Corporates in the VC and PE space isn't exactly an immensely popular global trend. In the US, IBM and Intel have proprietary models, which are basically designed to make strategic investments in start-ups. Third-party models do exist, but in most cases, they are arms of financial institutions. Examples: Citi Venture Capital, Goldman Sachs Private Equity Group, Morgan Stanley Private Equity and Standard Chartered Private Equity.
These are more on the lines of the PE operations of an IDFC or an ICICI Bank, both financial services majors. True, the PE operations for the Tatas, Kumar Birla and Anil Ambani are all a part of their respective financial services arms, but then those financial services arms, in turn, are just one prong of these highly-diversified groups.
Also, unlike Wipro's Azim Premji and Infosys' N.R. Narayana Murthy,the Indian corporates foraying into the PE and VC space are investing group funds rather than their personal wealth (Premji invests via PremjiInvest and Murthy via Catamaran Management Services).
HARSHAL SHAH, CEO, Reliance Venture Asset Management "We work with startups in media, entertainment and communications where we end up generating benefits because of the synergies that are available in our group"
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For this purpose, Kadle is planning to launch a mid-market growth fund in a strategic alliance with Mizuho Group of Japan. Banka of Aditya Birla Capital has raised Rs 880 crore as of March. "We have committed roughly eight per cent of the fund so far," says Banka, who has scanned over 200 companies in the past six months.
His focus: Infrastructure enablers and consumption-oriented businesses in the growth stage. Milestone Religare has already committed Rs 200 crore to the health care and education sectors, and Rajesh Singhal, Managing Partner, reveals that plans are afoot to raise $200-300 million from the overseas market via a second fund.
Looking for opportunities in highgrowth sectors is one objective; another is to find businesses with potential in related areas. Reliance ADAG, for instance, has floated Reliance Venture Asset Management to incubate ideas in communication, entertainment and media-all sectors in which the group has established operations.
PRAVEEN KADLE, MD, Tata Capital "Our private equity idea germinated from supporting companies in the TATA ecosystem"
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Clearly, along with deep pockets, the management bandwidth that these corporations possess could prove a perfect foil for entrepreneurs looking for expertise and capital to fuel their ideas. "The big positive for any corporate-sponsored PE is the knowledge base of the group that can be utilised for investing in the companies," says Singhal, who has a pool of medical professionals from the Singhs-owned Fortis Health care to fall back on.
Kadle of Tata Capital is counting on the sheer breadth of experience across the 96-company strong Tata Group. "We can use their services as consultants and advisors to add value to investee companies," says Kadle.
An apprehension, however, for many growth-oriented businesses is the fear of losing their independence as the end game admittedly for many of the big corporations is a buyout. What's more, management expertise can also have a flip side, with deep involvement in investee companies being perceived as constant interference. "We prefer representation on the board. That brings discipline into the investee company," avers Banka.
But then again, PE majors like Warburg and Blackstone, too, are known for flexing their muscle on the strategic front, so the choice for many capital-hungry, growth-oriented businesses could be that of the Hobson variety-take the capital, whether from a corporate-sponsored or a pureplay PE, or leave it.
The good news for businesses that need funding is that the conglomerates have opened up a new, huge window for financing. Over the past five years, close to $40 billion has flowed into India as PE investment, $12 billion more is expected to come in the current year itself till December 2010. With big business in the fray, that number can only get larger-faster.
THE CORPORATE PE MODEL
- Sponsor a Third-party Fund
The corporate brings 5-20 per cent as its capital contribution to a fund and the balance is mobilised from domestic as well as overseas investors. Examples: The Tatas, Aditya Birla, Reliance ADAG - Deploy Own Capital
This is a proprietary model where the corporate signs the full cheque to incubate new ventures and also invest in companies outside where it sees a potential of growth. Example: Mahindra & Mahindra - Partner an Independent Advisor
This is the model where the corporate enters into a joint venture with an advisory firm to float PE funds, with the latter taking the investment decisions. Example: Religare
