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Domestic Institutions To Emerge As Major Limited Partner Class

25 August, 2009

Anil Dhirubhai Ambani Group (ADAG), which has made a habit of doing things on a mega scale, is close to raising Rs 1,500 crore to set up its first independent third party private equity fund. Reliance Equity Advisors, the PE arm of ADAG, is tapping domestic investors such as LIC and high networth individuals to raise capital in such remarkably challenging times.

Ramesh Venkat, CEO of Reliance Equity Advisors, is confident of a first close of Rs 1,500 crore by September end. The fund, which has a 12-member team, expects to make its first investment next month and is closely chasing two deals; one in education and the other in pharma. “The deal pipeline is very good,” says Venkat, who was earlier the group chief financial officer (CFO) of Vedanta/Sterlite Industries. Reliance Equity expects to invest the corpus over 15-18 months following the first close. The present fund vehicle can raise up to Rs 3,000 crore.

PE play is not new to the group which had earlier floated a power fund with Singapore state investor Temasek. The new fund has positioned itself as an independent third party player by laying out clear-cut guidelines (two or more external co-investors with similar terms and a 10% cap on aggregate commitments) on investments into ADAG companies. In a wide-ranging interview with VCCircle, Ramesh Venkat talks about the fundraising process and opportunities in the Indian PE market. Excerpts:-

Q. Have you made your first close?

We launched our domestic fund-raising programme about 6-8 weeks back. It is still work in progress. We are looking at a first close around September-end. We don’t have a firm deadline yet. We are targeting banks, institutions, HNIs and NRIs to raise Rs 1,500-2,000 crore. ADAG

will invest Rs 300 crore in the fund. We expect Rs 700-800 crore to come from institutions and maybe a little less from the HNIs. Most of the commitments are in the pipeline. With a few institutions, we have already got the commitments. It’s a process that takes time. Many are willing to commit but you don’t actually see the commitments till the last date. But, the indications are very good.

Q. You are currently targeting the domestic market. Why not the foreign market?

The reason we chose the domestic market, at this point, is because the foreign markets are still quite tentative. The general feeling we got was that a first time, emerging markets fund may not find it easy to access capital in an extensive way. That’s why we hit the domestic markets as investor sentiment in India has improved quite a bit since May-June. So, it makes sense to do a first raise here and thereafter go overseas. One cannot ignore foreign markets because real size can be achieved only when you get there. Once we see some recovery, we will look at fund raising from there as well. 

Q. Do you see domestic institutions emerging as a significant limited partner class?

I would think so. For instance, LIC has always had an equity culture. LIC has been looking at PE funds for many years now and they have invested in a number of venture capital funds too. For many banks, it’s a more recent phenomenon. Many of them are extremely receptive to this concept.

Domestic institutions would emerge as a major LP class in times to come. Some banks will even set up their own PE funds, which, over time, will limit their exposure to other funds. But a majority of them will still want to participate in this asset class by investing in other PE funds.

Q. How will the private equity arm leverage the ADAG brand?

Through the group’s networks, we have direct access to a large number of deals on a proprietary basis. We could bring to portfolio companies the group’s expertise in areas such as access to capital markets, expanding to different markets, innovative methods of financing and structuring. In fund-raising too, it makes a huge difference as ADAG is very well-known in the institutional and retail markets.

Q. What kind of deals will you focus on?

Growth and consolidation will be the main themes. Hopefully, the company we invest in will be the consolidator. We would like to do buyouts but those opportunities are limited in India. As the market matures, we expect to find promoters willing to exit.

The PE fund would be sector agnostic but will focus on newer industries like media, logistics, pharma and financial services. It would look at investing Rs 150-200 crore in each deal.

Q. Reliance Capital has been making private equity investments from its balance sheet. After the launch of this fund, will that activity continue?

There will be no PE investments from the prop book. But, of course, Reliance Capital does a lot of other investments in primary and secondary markets which will continue.

Q. What is Reliance Capital’s broader alternative investment strategy? Will you look at real estate and hedge funds?

We would like to look at all the opportunities in the financial services space. Reliance Capital is present in practically all the larger financial service businesses. They are the market leader in most of them like mutual funds, insurance and now we have private equity and asset reconstruction arms. We will look at opportunities where we don’t have a presence. We examine them on a constant basis and we will enter those areas when the time is right.

Q. What is your take on valuations at this point in time? Do you think the PE market is overcrowded?

Promoter expectations continue to remain fairly high. That is an issue in the Indian market although we are finding some deals where valuations are realistic. While there are many funds operating in

India, the competition is still not that much. In most of the deals, we find the same 3-4 names cropping up. Majority of funds tend to be niche players and not very active.

Q. Do you find secondaries as an interesting opportunity?

There was a lot of buzz but not too many deals are happening yet. A lot of firms have made investments in the last 2-3 years where valuations may have changed. Also, the status of a number of funds has changed where their overseas partners are not as active as they were. One would have thought there would be a number of investments being shed and restructured. Surprisingly, there have not been too many such cases yet. Secondaries could happen in a substantial way in the Indian market in the near future.

(Photo courtesy: Ashesh Shah / Mint)


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1 Comment
rC . 6 years ago

In US, anyone investing above $100K would be required to sign a special form accepting the understanding of associated riks. Given lack of PE understanding in normal HNI, I wonder how ethical is it to launch a PE fund for retail investor. Indian HNIs do not know the risks associated with PE kind of investments, need for objective partners, correct incentive alignment of the partners Vs getting aligned to a specific corporate house, high fees charged by funds (2% p.a.), carry they will take etc. I see regular small time DSA of ICICI bank trying to sell these to me.

Domestic Institutions To Emerge As Major Limited Partner Class

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