Private equity's power leg-up

In July 2009, the board of Bangalore-based Manipal Universal Learning, the corporate education arm of the Manipal Group, was tossing around the idea of buying a foreign university. Growing at a ripping 35 per cent annual pace in three years, Manipal Universal had already acquired a controlling stake in three educational institutions - U21 Global, American University of Antigua and MeritTrac.

CEO Anand Sudarshan wanted to accelerate further. He proposed spending $100 million on the acquisition and sought board approval. Sudarshan's enthusiasm and perseverance got most board members on his side. But for two: Raja Parthasarathy of IDFC Private Equity and Vivek Kalra of Capital Group. Both were not comfortable with the price. The idea was discussed between the members, but no conclusion was reached.

The proposal was referred to the company's investment committee, which deep-dived into an extensive due diligence process. In a few weeks, the committee was ready with its findings and it shocked Sudarshan. "The report said that Manipal Universal would have paid many times more than the actual worth of the institution," says he, adding the idea was immediately dropped.

As risk capital-typically funding from venture capital and private equity (PE)-becomes increasingly an avenue that companies turn to, more and more instances akin to Manipal Universal are throwing up evidence of the big step-up role that such funders are playing in Indian start-ups and growth-stage companies. There is increased acknowledgement of how much strategic value, sector expertise and support in areas such as global access, new business models, fiscal discipline, corporate governance and senior hiring that PE firms bring along with them.

Take the case of Ace Refractories, formerly a division making kilnlining bricks at cement maker ACC. Although the division was profitable, it accounted for less than five per cent of ACC's revenues and when Switzerland's Holcim bought majority control in the Indian firm, it decided to put the refractories business on the block. ICICI Venture, India's top PE firm, bought it for Rs 257 crore in 2005.

Right off, ICICI Venture realised how specialised a business refractories were and the importance of retaining talent. It revised compensation and introduced a stock option programme for the entire management. Then, to combat shrinking domestic demand, says Umesh Deveshwar, MD, Ace, the company focussed on export markets. In the first few weeks itself, ICICI Venture asked Nagpur-based Ace to create a new plan for new markets such as Southeast Asia and Europe and focus on turnkey projects, R&D, new products, services, and global sourcing of raw material. The target: double sales in three years with a close check of each step on the way.

The results were eye-grabbing: Ace's exports went up from 11 per cent (Rs 20 crore) to over 20 per cent (Rs 80 crore) of revenues in two years. It began sourcing 100 per cent of its raw material from China, which helped it cut costs by about 15 per cent. Ace introduced four new products, which enabled the company to maintain its market share in the shrinking domestic refractories market.

Its revenue rose to Rs 319 crore in 2007-08 from Rs 179 crore in 2004-05 at a 21.24 annual clip, nearly 10 times the pace it had grown as a division of ACC. (In September 2007, ICICI Venture sold Ace to Calderys, the refractory division of French firm Imerys, for Rs 550 crore, more than double the price it paid for it.)

Investing experiences like Ace are resonating in the PE industry. Experts say, especially after the downturn, the involvement of PE partners in an investee company's operations has grown significantly. "There is pressure on PE firms to turn around the companies they have invested in the last 3-4 years. A majority of PE firms is now hiring operational partners within the firm who may not get directly involved in running day-to-day operations, but are coming up with clever ways to control costs and improve operational efficiencies," says Vikram Utamsingh, Executive Director & Head (Private Equity), KPMG.

Trucking Synergies
In Chennai, in 2006, after global PE major Texas Pacific Group (TPG) invested $100 million in Shriram Transport Finance, the buyout firm's partner Ranvir Dewan was appointed on the board of STF. Dewan, a former Vice-President with Citibank, focussed on faster implementation of an information technology project across 400 branches. Dewan "introduced reporting mechanism to review the progress on regular basis," says Arun Duggal, Chairman, Shriram Transport Finance. Another area where TPG's expertise came in handy was in training staff on asset and liabilities management, and shift from a manual to an electronic management system.

Shriram Transport's portfolio, whose assets under management stood at Rs 5,426 crore when TPG invested, has risen to Rs 30,030 crore by 2010. Profits grew eight-fold to Rs 800 crore. "Better credit ratings have improved the company's stock price and given better access to lowcost funds," says Duggal.

Similar was the transformation at Manipal Universal. In 2006, an IDFC PE-led consortium that included the American buyout firm Capital Group invested around Rs 300 crore in it to fund its expansion plans. "In India, there is a huge demandsupply gap of skilled labour for the manufacturing sector. So far, the industrial training institutes have failed to bridge this gap. Keeping this fact in mind, we identified new areas of business that company could expand into-vocational and skills development education," says Parthasarathy, Managing Director, IDFC PE.

The PE firm enabled the group's joint venture with the UK's City & Guild, a provider of professional and skills education, first. Second, the group, historically run by family members, was able to swiftly expand its professional management team. It was IDFC PE who introduced CEO Sudarshan, CFO Shriniwas Joshi and Head (India Operations) V.

Sivaramakrishnan to the promoters. With the help of its PE investors, Manipal Universal was able to renegotiate the price of the Antigua campus from the agreed upon price immediately before the economic crisis in the US.

In three years, Manipal Universal's revenues grew over five times from Rs 200 crore in 2006-07 to Rs 1,000 crore in the fiscal year gone by. Moreover the share of vocational and skills development piece in the total revenues has gone up from five per cent to 10 per cent now. The company has also spelt out aggressive plans to expand its vocational education centres from 25 now to 500 in the next five years.

Elsewhere, in Okhla, near Delhi, Ranbaxy Laboratories, in 2005, decided to sell off its animal health, diagnostics and lab chemicals business called RFCL. The buyer was ICICI Venture, which asked RFCL Managing Director & CEO Sushil Mehta to prepare a new growth plan. ICICI Venture "asked us to enhance the scope as it was not interested in paying dividends out of the surplus cash," he says.

Mehta added a new manufacturing plant for animal health in Haridwar and two R&D facilities in Mumbai and Delhi. The PE partner also directed RFCL to take the inorganic route to grow. "They pushed our team and even managed to bring in $20 million from a UK-based hedge fund, GLG Partners," he says. In the next three years, the company made four acquisitions-Alved Pharma & Foods, Wipro BioMed, Godrej Medical Diagnostics and Bremer Pharma.

As a result of these measures, the company achieved its four year targets a year in advance and retired more than 80 per cent of its debt. It grew revenues from Rs 154 crore in 2005-06 to Rs 415 crore in 2009-10. Today, the value of RFCL is over 12 times the assessment made by ICICI Venture five year back, according to Mehta. That doesn't include the amount cashed out from the sale of animal health business to Pfizer for around Rs 300 crore in December 2009.

"We played a very active role in steering RFCL towards a profitable business," says Vishakha Mulye, ICICI Venture's MD and CEO. "For instance, we were able to successfully tap into latent strategic interest from global market leaders such as Pfizer Animal Health... thereby giving it a global platform for future growth."

The implications are clear: A startup could find traction on limited sources of funding in initial years but for the big growth the odds are better off in the company of a PE partner.