“We depend substantially on our senior management and key management personnel, the loss of whose services would have a material adverse effect on our business, results and financial condition…. Accordingly, our success depends on the continued service of these individuals and the loss of the services of one or more of them could have a material adverse effect on our business and could harm our ability to maintain or grow AUM in existing funds or raise additional funds in the future… The loss of these personnel could jeopardize our relationships, especially with the key investors in funds advised by us and members of the business community, and result in a reduction of AUM to the extent of uncalled or unpaid capital, adversely impacting the growth of our AUM and/or result in fewer investment opportunities. We do not carry any “key man insurance policies” for our senior management and key management personnel, in the event of death or disability of any of such persons while in the service of the Company.”

When Milestone Capital mentioned these words in its draft red herring prospectus filed with the market regulator SEBI last year for its proposed public float (that didn’t eventually go through), the company must have treated it just as a disclosure for an eventuality. But with the sudden death of its young founder and chief executive Ved Prakash Arya last week, Milestone Capital suddenly finds itself in the middle of a vortex.

At stake is a fairly young firm that has assets under management worth nearly $1 billion, through almost half a dozen funds – either run directly or through its joint venture partners. This makes it one of the bigger home-grown PE firms in India at present. VCCircle spoke to a cross section of the industry to figure out what happens next for Milestone.

First Things First

To begin with, the board of directors of the asset management company are meeting on Monday (September 5, 2011) to induct the late founder’s wife Ruby Arya as one of the directors to the board, two people with direct knowledge of the development told VCCircle.

The board of directors includes Nawshir Dara Khurody (former MD of Voltas), Amit Dalal (executive director, Tata Investment Corp), Raj Narayan Bharadwaj (former CMD of LIC), Bhagyam Ramani (executive director, GIC), V K Chopra (former CMD of Corporation Bank and SIDBI), Ashish Joshi (whole time director & Managing Partner – Real Estate, Milestone Capital), Paritosh Kakkad (whole time director, CFO, Head of Risk Management, Milestone Capital), besides two independent directors – Pravin Shah and Arvind Bansal.

Although Ruby Arya has not been involved in the business and has no fund management experience, she gets in by virtue of the promoter group’s holding of 87 per cent stake in Milestone Capital, largely through privately held firms, as per the DRHP filed last year. She is currently looking after HR operations at Kingfisher Airlines and will join the 10-member board as the promoter director.

But even for a seasoned HR professional, the task at hand would not be easy. Here, the key challenge is somewhat different as the private equity business is run as a one-to-one relationship between general partners (GPs) or fund managers and the limited partners (LPs) who are the real source of capital for PE firms. With Arya’s death, the ‘key man’ clause in the LP-GP documentation now gains the centre stage and the outcome largely depends on how the LPs are going to react to this situation.

Right now, there are three possibilities for Milestone.

Internal Succession

It cannot be business-as-usual, as Ved Prakash Arya was the face of Milestone Capital. But if the board of directors and operating heads manage to convince the LPs to continue as investors, they should have a new person who can quickly take over the reins of the asset management company.

According to industry sources, the most likely candidate for the CEO’s job appears to be Ashish Joshi. Joshi is part of the founding team at Milestone and he has been with the firm almost since its inception. He has joined Milestone four years ago and currently heads the real estate investment arm at Milestone – driving the strategic investment decisions for real estate development and yield-driven funds. He oversees complete fund performance and asset valuation across all investments and holds the key responsibility of maintaining developer and partner relations.

Moreover, with the real estate fund management division forming the majority of the business at Milestone Capital, a senior representative handling that chunk of the business turns out to be the most obvious choice. However, this could not be independently verified from the company.

Acquisition Target

In such a situation, one cannot rule out a possible acquisition by competitors, existing partners or even by a FOF (fund of funds).

“If the current management is not too keen to continue on their own or if there is a real risk regarding flight of capital, then one of the viable options is to consider acquisition or merging with the operations of another asset management firm, which will ensure continuity of operations and also prevent the flight of capital. LPs may quite possibly welcome such a move, as long as they have the confidence that the acquirer has the depth and experience to smoothly absorb and integrate the people and operations of such a fund,” says Vijay Sambamurthi, managing director of Lexygen, a Bangalore-based law firm.

Such portfolios can either be sold on a piecemeal basis or as a barrel portfolio, depending upon who the buyer is.

Milestone is primarily into two businesses – private equity and real estate investments – and has joint ventures for both these practice areas. It has 40 per cent stake in a joint venture with India’s biggest domestic PE firm IL&FS Investment Managers Ltd for two real estate funds and a separate JV with financial services group Religare for private equity.

Independently, Milestone also runs two domestic schemes, MDS-I and MDS-II, with a committed corpus of Rs 230 crore and Rs 510 crore, respectively. Fundraising for MDS-III, with a targeted corpus of Rs 500 crore, is currently under way.

With JV partners having a significant know-how of the business dealings, along with Milestone Capital, possibilities emerge that they can buy out the corpus and the team, and fully manage the funds. Both Religare and IL&FS Investment are sitting on capital and have been fairly aggressive on acquiring firms in asset management business.

IL&FS Investment had acquired Saffron Asset Advisors to emerge as the largest domestic PE firm while Religare entered the domestic mutual fund business by acquiring Lotus Mutual Fund business, besides the international private equity firm Northgate Capital.

Typically, such situations can also attract fund of funds, secondaries or all those sitting on pools of capital – the Piramals, for instance. Piramal Healthcare, which sold its domestic formulations business in a multibillion-dollar deal, has recently entered financial services and is keen on building the business.

Incidentally, it also has a significant exposure to real estate investments through IndiaReit.

End Of The Road

There is another possibility that the firm will fold up and investments will be liquidated if it actually faces redemption from the LPs.

But one would have to see if the LPs have a right under the fund documentation to withdraw their capital commitments upon the occurrence of such tragic events, says Sambamurthi of Lexygen.

Often, if a person or a group is considered critical to the LP’s decision to back a fund, the fund documentation will contain a specific ‘key man clause,’ which will give the LPs the absolute right to withdraw their capital commitments upon the death, resignation or termination of such key person/persons. “In such situations, the remaining management team of the GP will definitely have to make a lot of effort to convince the LPs not to withdraw their capital commitments,” affirms Sambamurthi.

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