The US regulator’s civil proceedings against former McKinsey & Co managing partner Rajat K Gupta has no direct impact on the daily operations at New Silk Route Partners, the $1.4 billion private equity firm he had co-founded, a senior official of the PE firm told VCCircle in an interview.
“It was very clear from the beginning that Rajat is the chairman of the fund. As far as the day-to-day analyses of the companies are concerned, Rajat was not involved. He is not on the board of any of our portfolio companies and never was,” said Jacob Kurian, Partner of New Silk Route Partners.
In March this year, the 62-year-old was accused by the Securities Exchange Commission of the US of having passed confidential information to Galleon Group founder Raj Rajaratnam who, in turn, used the crucial information to trade in stocks. Some of the charges include that in 2008, Gupta had allegedly passed on information to Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs. Gupta was a director on the board of Goldman Sachs at that time and was privy to these decisions.
Rajaratnam was convicted on May 11 for running an insider trading ring and now faces almost 20 years in prison. Gupta, however, faces no criminal charge yet, as SEC has filed a civil administrative proceeding. Meanwhile, Bloomberg reported on July 6 that Gupta’s trial, scheduled for July 18, has been postponed for six months.
After Gupta was accused of aiding Rajaratnam in his insider trading activities, there were questions raised on the future of NSR, set up in 2006 by Gupta and another leading global investor Parag Saxena, to invest in private companies in the Indian sub-continent and other rapidly growing economies of Emerging Asia. Saxena is the founding General Partner and the CEO of New Silk Route Partners.
Kurian reiterated that the allegations against Gupta did not have an impact on NSR’s dealing with its clients, nor did it impact its Limited Partners.
NSR has 14 companies in its India portfolio and some of the prominent investee companies include Cafe Coffee Day Resorts & Hotels Ltd, Reliance Infratel, 9XMedia and Sri Chaitanya Education Group. The firm has also invested in a school in neighbouring Pakistan.
In March, following the insider trading controversy, Gupta took “leave of absence” from the management of the PE fund. He took leave to “avoid any distraction and ensure New Silk Route’s continued focus on execution of its investment strategy,” according to an earlier statement from NSR.
Kurian also denied a recent news report which stated that the private equity firm was not selected for an investment process due to the reputation risk issues surrounding Rajat Gupta. The NSR partner categorically said that the report was completely “untrue” and that they deliberately opted out of the deal as the promoters of the company were asking for a very high price.
Kurian was referring to a recent report in a leading business daily which said that IOT Infrastructure & Energy Services Ltd, an arm of Indian Oil, had decided to ignore a bid by New Silk Route because of the Gupta episode.
“We think it’s a great company but nowhere close to the valuation expectation that it has. It is about the 1/100th the size of L&T, but they wanted L&T’s valuation.” Kurian added that their investment committee did not think that the company merited such valuation.
Platform Plays, More Hands On Investing
NSR, on the other hand, is getting more operational-driven, and it is even acquiring majority stakes in companies or taking over the management control, the executive said. “Once we put in the money, we need to make sure that we take the money back (at a profit),” Kurian said.
The companies where NSR has operational control include Ascend Telecom Infrastructure Pvt Ltd (formerly Aster Infrastructure Pvt Ltd) and Destimoney Securities Pvt Ltd. For instance, the PE firm controls and manages 9XM, the music channel which, according to Kurian, already ranks neck-to-neck with MTV India in the music niche.
The trend of PE firms incubating companies is gaining currency as deal-making is becoming extremely challenging, primarily due to high valuations. In a recent example, three PE firms, the private equity arm of Goldman Sachs Group Plc., Everstone Capital and Beacon India Private Equity, set up a non-banking finance company Indostar Capital Finance Ltd. The three PE firms will hold a majority stake in Indostar.
According to industry observers, such deals help PE funds not only get through lean deal-making periods but also develop a unique positioning with the LPs for future rounds of fund-raising. “Ultimately, the math on PE investing is the difference between what you enter at and what you exit at,” said Kurian, who was earlier the chief operating officer of Tanishq, the jewellery chain of the Tata Group.
“Given that a 5-7 year window the PE has and you have to literally treble the growth, perhaps going for a platform play route makes more sense,” he adds. The firm has had some success with hands-on approach, particularly in its investments in companies like Destimoney, 9XM and Ascend Telecom. It is now looking to replicate such platform investing plays for its future investments.