VCCircle

UTI Venture Funds (UTIVF) is the largest state-owned private equity fund with about $220 million under management. Its latest Ascent India Fund with a corpus of roughly $170 million was launched in April 2005. UTIVF has been seeing an increased dealflow in the last few months. From April 2006 onwards, the Bangalore-based fund invested in four companies - CCCL (led a round of $27 million alongwith other investors), Koutons Retail ($12 million in two rounds), Laqshya Media ($10 million) and Vallabhdas Kanji ($6 million). They are going to close a few more deals very soon and by then half of the second fund would have been deployed.

UTVIF claims about 35-40 per cent IRR for its first fund. It's worth noting since I can't remember any fund of that vintage (year 2000) let alone clocking that kind of returns but even escaping unhurt. ChrysCapital and Citigroup Venture Capital had written off several investments. UTIVF on the other hand took haircut in three investments from its first fund, but did have some winners like Subex Systems where they are 15 times in the money and FourSoft 4.5 times.

Although from a PSU lineage, UTI Venture Funds is making the right moves and will find a place among the top private equity funds in the country as they are close to making a few liquidity events.

I caught up with Raja A Kumar, MD & CEO, UTI Venture Funds Management, last week. Excerpts:

How much money do you manage currently? Any plans to raise a new fund?

We manage a little over $220 million. While our Fund I was a smaller fund, Fund II is bigger... We would like to complete a significant part of Fund II before embarking on Fund III.

What is your current focus of investment? I assume you have shifted from an early stage to mid-stage and even mature businesses?

We are a mid-market focused growth capital fund. While we initially made a few early stage investments from Fund I, most of the investments were in growth capital space. So from that respect, there is no change in focus. We have continued with the same focus for Fund II, only we have enhanced the ticket size and broadened the sectoral focus.

UTI Venture Funds has been very active in the last two months. You invested in Vallabhdas Kanji (a spice exporter), an outdoor media company Laqshya Media and an apparel retail company Koutons Retail? Could you give us sense of your investment thesis for these companies and how do you intend to exit them?

Yes we have been busy and over the last 18 months we have made 11 commitments. All these companies are on a high growth path and would grow through an appropriate combination of organic and inorganic means. Our capital will enable them to achieve this objective. All these companies are expected to provide us excellent opportunities to exit through listing in the medium term. CCCL and Koutons are expected to go public next year.

There is a lot of competition for deals in the private equity space. Do you think it’s driving up the valuations?

While the competition is hot and has driven up the valuations, this has also helped in increased awareness and thus a concomitant expansion in the landscape. We are anyway a long term player and expect to witness such cycles in future too. Market corrections would allow us to correct the overall valuations of our portfolio. Additionally, the underlying growth potential will help a great deal in delivering returns for our fund, inspite of higher valuations, in certain cases. However, at the same time, I need to emphasise that we are not known to pay the high valuations. Most investments are on mutual comfort and not on competitive basis.

We are seeing high valuations across the sectors more being in technology space. Paying high entry valuation will work provided the investee company is on high growth path.

What is the status of your first fund? How many exits have you had so far, and what were the returns?

Our success ratio with Fund I was very good. We have made good money on 13 out of 17 investments. Our initial focus was on divesting our positions from companies whose performance was either average or below par. We continue to hold onto most of our winners, which we will liquidate at an appropriate time. Notably, we have already completed a significant part of capital redemption of Fund I, yes without touching most of our winners. Thus we are extremely happy with the performance of Fund I. Basing on the performance this fund will be the one of the top performers of vintage 2000 funds.

I assume that you had a few winners from the first round like Subex Systems, Divi’s Labs, and FourSoft. You got them early on. Do you expect to get similar picks for your private equity portfolio?

As I mentioned earlier, we are a long term player and are bound to witness cycles in the market. While sometimes we may pay more than what we might want to, we will get the opportunity to correct the same in some other investment. Since we back growth, we do not discriminate too much on the basis of market prices. For us fundamentals and the passion of the promoter/management teams are a bigger determinant. Moreover, we have invested in most of the companies at single digit multiples (on 12 months forward earnings) in most of the Fund II companies. Thus we stand to make decent returns even in case of an exit in a depressed market.

Will you ever do early stage deals now that the focus has shifted to private equity?

As I said our focus shift was about 4 to 5 years back and not now. We continue to retain our focus. We have selectively looked at early stage companies. However, it will take a compelling opportunity to tempt us to invest. We are extremely exit focused and seldom allow our hearts to dictate investment decisions.