Tata Capital PE Raises $800M; Praveen Kadle On Fund Raising, Strategy

Tata Capital, the financial services and asset management arm of Tata Sons, has raised $800 million for its private equity fund business and is on track to raise $1 billion by 2012. The company has five funds such as Tata Opportunities Fund, Growth Fund, Innovation Fund, Healthcare Fund and Special Situations Fund. The PE firm has invested $150 million across six investments till now including two Tata group companies.

In an interview to VCCircle, Tata Capital's Managing Director and CEO Praveen Kadle talks about the rationale behind floating multiple funds, the conflict of interest in investing in Tata companies and the expansion plans ahead. Kadle has been associated with the Tata Group for the last 16 years in various roles such as the Chief Financial Officer of Tata’s joint venture with IBM in India and as Vice-President (Finance) of Tata Motors Ltd. Excerpts:

What is the rationale of floating so many funds from Tata Capital private equity?

More than the fund, I would like to talk about the themes, starting from the innovation side and going right up to a special situation. In all, our main focus is on growth and expansion.

So, why did we go for the five themes? If India’s GDP growth amounts to 8-9 per cent every year, then significant growth will happen across many of these areas, particularly in the manufacturing and service sectors. That is why we have created funds where we can participate in the early-growth phase of some companies.

Also, while we are looking at growth, there may be some companies who have initially planned for growth but haven’t gone for the right kind of mix of equity and debt when it comes to long-term fund-raising and, as a result, are leveraged. So, there are companies where the business model is good, the management is good, but the whole fund-raising is completely skewed in the sense that they have raised money for their projects and expanded the same without any long-term commitments.

Therefore, they have become highly leveraged and that gives you opportunity to put equity in these companies. Our whole theme has been to provide operational support. We are not just financial investors like most of the private equity funds. Being a fund promoted by a large industrial house like the Tata Group, we can provide significant value in the operational side right from manufacturing, technology, marketing, IT and HR practices. Within healthcare, we are looking at all segments including healthcare facilities, manufacturing in the pharma sector and other related areas.

Then of course, there is innovation, as a lot of companies are looking at how to go to the next level by bringing in innovative technologies on board. We, therefore, thought that we could also play a role here by providing financial support and using the Tata ecosystem – so that these would fructify into a good growth story.

Tata opportunity, growth fund and healthcare fund form a part of the overall growth theme and the remaining will go to special situations and innovation.

We are not looking at real estate and infrastructure. Other than real estate and infra, we are ready to invest in any of the industrial segments, more particularly in the areas of manufacturing and services. We will invest in manufacturing processes, engineering services, logistics services, healthcare, education and so on. So I think we have covered almost all the themes which can really propel this growth of 8-9 per cent over the next 10 years.

In terms of investment allocation, how will the distribution look like across various themes?

Our pre-dominant investments will be in growth areas. So, I would say that almost 80 per cent of investment should go into the growth areas. And when we talk about growth areas, we are talking about Tata and non-Tata companies. Out of the billion dollars that we have, you can say the share between Tata and non-Tata entities will roughly be 50-50.

About 80 per cent of the fund will be invested in expansion, which is basically growth area. The remaining 20 per cent will be for special situation and the innovation.

How do you look at special situation fund? Is it a good asset from a distressed player or a distressed asset only?

It's a good asset from a distressed player, as you rightly said. For instance, we have made an investment in a foundry company. The promoter was good, the asset was good, but the funding structure was completely wrong. The company tried to expand through short-term working capital and it’s basically fund diverted to long-term projects. But financial crunch hit the company hard and they found themselves totally on the wrong side of the business cycle because no long-term funding commitments had been made.

LPs today increasingly show preference towards non-captive funds. How have you leveraged the Tata brand for fund-raising?

We are on track to raise $1 billion by December this year. And we did the first close at $800 million on March 31 this year. Out of the $800 million, only 12 per cent of the commitment has come from the Tata Group and the remaining 88 per cent from LPs – both domestic and international. Out of $800 million, $220 million came from domestic investors and the remaining $580 million came from international investors. It well reflects their confidence in the Tata Group private equity business.

How much have you invested till date?

Till now, we have invested $150 million across six companies.

The valuations are on the higher side now. How are you reading the current private equity deal-making environment?

Generally speaking, this is true. But we are trying to source many of these deals through the Tata operating companies. So fortunately, we get access to these deals much before the investment banks come into the picture.

You recently invested into a Tata group company – Tata Technologies. This is reportedly a conflict of interests and there have been reports which state that shares have been issued at a lower price to benefit the promoter group. If such situations arise, where do you exactly draw the line?

Let me clarify the point. When Tata Technologies decided to raise money from private equity, it invited bids from many private equity players. And Tata Capital was not the only PE firm which was in the race. Many other reputed international PE firms were also in contention. Therefore, the company invited bids from all these players and the same information was shared with all prospective investors. But the bids made by the five investors were way below the offer made by Tata Capital.

So, the company looked at the proposals from the five different players plus the one presented by Tata Capital's Private Equity arm. And our pricing was much higher than what was offered by the other players. I must tell you that the entire procedure including the due diligence, evaluation, inviting the bids and the actual investment took almost a year, and nothing was done behind closed doors.

Whenever we see a situation where there can be a conflict of interests, we place all the investment decisions before a separate conflict committee which has no representation from anybody from the Tata group. The decision of the conflict committee is binding on the private equity fund team. In this case, the valuation which was offered to Tata Technologies was approved by the conflict committee.

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