Jewel In Their Crown
Outlook Business - October 03, 2009
These 21 private equity and venture capital fund managers have built a sparkling portfolio of deals. As they brace for another run, they pick their best so far.
Snigdha Sengupta
Renuka Ramnath does not waste time. Barely four months after a rather sudden departure from ICICI Venture, Ramnath is already on the road raising a $450-500 million private equity (PE) fund for her own firm, Multiples Alternate Asset Management. Among one of Indian PE’s most seasoned dealmakers, she probably senses that the current environment is opportune for cherry-picking the best deals.
Ramnath is in good company. Former Citi Venture Capital International (CVCI) Managing Director Ajay Relan struck out on his own last July to found CX Partners. Relan, who led CVCI for 13 years, is raising a $750 million fund. Another veteran already making his presence felt is Pulak Prasad, who quit Warburg Pincus in 2006 to start Nalanda Capital in Singapore. The firm invests exclusively in listed companies and has notched up several deals since last October.
Also waiting in the wings is UK-based Actis’ JM Trivedi, who is warming up for a fresh spate of deal-making from its $2.9 billion global fund raised last December. New Delhi-based ChrysCapital’s Ashish Dhawan is currently scoping out the next bunch of emerging sectors to go after. He has had a quiet year so far after a spate of public market deals, also known as PIPEs (private investment in public equity), through 2008.
The Journey
Between them, these five individuals have executed some of India’s best PE deals over the past decade. Prasad’s 1999 Bharti Tele-Ventures investment gave Warburg Pincus and India its biggest PE exit so far—Warburg earned $1.9 billion on a $292 million investment. Ramnath has to her credit ACE Refractories in 2005, the country’s first PE buyout.
Relan has a knack for picking winners early - i-flex Solutions, Axis Bank and Daksh eServices are clear examples. Dhawan is still best remembered for a spectacular exit from Spectramind in 2002, which validated the third-party BPO business model. He is equally well-remembered for making PIPEs, starting with MphasisBFL in 2001, an essential part of PE’s lexicon in India. Glenmark Pharmaceuticals, one of Trivedi’s notable deals, made in 2002, was one of the first PE investments in the then emerging new-molecule research space.
"It’s no coincidence that the picks of our 21 dealmakers showcase how private equity works as an active fund manager."
As India’s PE market undergoes significant shifts again, in the aftermath of the 2008 global financial meltdown, experience promises to prevail over exuberance. Leading the way will be a generation of dealmakers who scored their best deals largely after the last downturn, which started in 2001. In the pages that follow, 21 such dealmakers—besides PE investors, early-stage, venture capital veterans such as Kanwal Rekhi, Sudhir Sethi and Sarath Naru—relive some of those deals, and why it left such an imprint on them.
Of course, the return on investment mattered—and some of the returns those deals delivered were phenomenal. But, for these stalwarts, it wasn’t their only takeaway, or sometimes even the key takeaway, from their best deal. Trivedi of Actis, who has done over 30 deals, likes to refer to a deal as “a journey”.
Others may not speak in philosophical overtones about the road they took. Yet, even their stories are sprinkled with diverse elements, tangible and intangible, that make these deals more than just about numbers. The entrepreneurs they stood by. The businesses they backed or built, some of which went on to reshape the business and social landscape. The minds they got to work with or observe from up close. The joy of working with buddies. The business challenges they overcame. The nervous thrill of trusting instincts. All this will be in evidence as the deal count picks up.
Value Creation
In recent months, the deal landscape has been lukewarm. The value of deals announced in 2009, till August, stood at $5.6 billion, against $8.5 billion in the same period last year, according to research firm Grant Thornton. But the dip in numbers is far from worrying for seasoned dealmakers. “The best deals are done during a downturn,” says Dhawan. He should know, having picked winners such as Gammon, Axis Bank and IVRCL during down periods.
“A good deal is one where value is delivered to all shareholders, including employees and customers,” says Pradip Shah, Chairman, IndAsia Fund Advisors, which advises PE firms and companies on deals. Shah started India’s first foreign PE firm, IndOcean Ventures, sponsored by Soros Fund Management and Chase Capital Partners, in 1994.
Value creation, post-deal, is fundamental to the PE business. It is not a coincidence that the deals chosen by our 21 dealmakers are each a showcase of how PE works as an active manager. Much of that was forgotten in recent years, particularly through 2007 and early-2008, when the stock market touched record highs.
The slowdown in deals now implies two things. One, the fly-by-night operators have been forced out of the market. Two, fund managers are spending more time with their companies. “The greater the value-addition, the better the quality of the exit,” says Nitin Deshmukh, CEO, Kotak Private Equity, and a 17-year veteran in this market. Deshmukh was part of the ICICI Venture founding team, where he scored deals such as Pantaloon, Biocon, Naukri and TV18.
For PE investors, the money made on exit is the final test of a deal’s success. However, it is not the most important criteria to judge a deal as the best. Deals that have had a profound social impact are far more significant. The BPO sector, seeded almost entirely by PE, is perhaps the best instance.
Certain deals in other sectors have had similar impact. Warburg Pincus-backed Bharti Tele-Ventures, apart from demonstrating that PE could make serious money in India, made mobile telephony affordable for the common man. Indocean Chase Capital’s investment in HDFC Bank was an important milestone in changing the way.
Indians bank today. ICICI Venture-backed Deccan Aviation turned the domestic aviation industry on its head by making air travel affordable for the railway passenger. And ICICI Venture’s bet on Pantaloon Retail’s Big Bazaar brought middle-class India into shopping malls. Grocery buying has never been the same again.
Such deals, however, are few and far in between. Along the way, the PE industry itself has matured, as have dealmakers. As the likes of Ramnath and Relan ready for a new season of deal-making, the best deals in this market are perhaps yet to come. Meanwhile, let’s relive some of the best of the earlier ones with these 21 dealmakers.
Nitin Deshmukh
Chief Executive Officer, Kotak Private Equity
Snigdha Sengupta on Nitin Deshmukh
Deshmukh manages an asset pool of $1.5 billion and has invested in over 80 companies since 1989.
Nitin Deshmukh, 46, still finds it difficult to believe that he signed a term sheet with TV18 in one day. But TV18, a deal he did for ICICI Venture in 1997, is among the five he picks as his best over a 20-year career.
“Raghav’s (TV18 founder Raghav Bahl) plan was to go from content to broadcast. The hook was a technology partnership with Asia Business News,” says Deshmukh. The partnership, however, collapsed soon after. It took all of Deshmukh’s persuasion skills to get his limited partners to honour the term sheet. “We had done our homework and I had a lot of comfort with Raghav’s execution capabilities,” he says. The investment paid off for ICICI Venture. The firm earned a reported 16 times its Rs 5 crore investment when TV18 went public in 2000.
Faith in the entrepreneur is central to each of Deshmukh’s five best deals. His faith would be tested again with Pantaloon Retail’s Kishore Biyani in 1999. At the time, Biyani wasn’t every institutional investor’s favourite, largely because his outfit was seen as unprofessional. But, he was also on the verge of giving shape to his Big Bazaar plans. Going against the counsel of his own team, Deshmukh put Rs 4.3 crore into Pantaloon. ICICI Venture exited with a reported 14 times return following Pantaloon’s public listing. Although Shopper’s Stop was also one of his high-profile retail deals, “Kishore is a favourite because of his amazing passion and understanding of the psyche of the Indian middle-class buyer.”
Deshmukh’s favourites hail from the earliest years of his career. The nascent nature of the PE industry at the time gave him the space to bond with entrepreneurs. Vadodara-based Sun Pharmaceutical’s Dilip Shanghvi was one. Although ICICI Venture invested Rs 1.02 crore in Sun in 1993, Deshmukh had been talking to Shanghvi for 3-4 years before that. “I used to take the overnight train to Vadodara to meet him,” he recalls. ICICI Venture exited Sun Pharma in 1994 after the company went public and earned a reported 33 times its investment.
Biocon, in 2000, was also preceded by an extended wooing period. Since 1997, Deshmukh had been trying to persuade founder Kiran Mazumdar-Shaw to merge her five companies, so as to earn greater value on a possible investment. Biocon was looking to start manufacturing statins (drugs that lower cholesterol in the blood), for which, it needed money. Statins were poised to go off-patent in a few years, and Deshmukh sensed a big opportunity. In 2000, post-merger, ICICI Venture invested Rs 18 crore, part of which was invested in subsidiary Syngene. It exited the company in 2004 after Biocon went public, making a reported 60 times its investment.
The year 2000 was also when Internet deals were at their peak. Deshmukh’s deals included Baazee, Hungama and Naukri. His reason for picking jobs portal Naukri as the best is simple: “It addressed a real need and had the potential to transform a traditional business.” Founder Sanjeev Bikhchandani has certainly delivered. ICICI Venture made a reported 34 times return on its Rs 7.3 crore investment when Naukri went public.