Raja Kumar, managing director and CEO of UTI Ventures, can claim his position as the king of exits. In one of his best, he made 50X from Excelsoft (invested Rs 2.5 crore in 2001 and took out Rs 125 crores in 2008). He has completed 21 exits so far and says most of his investments (from the second fund) are now worth 3X to 4X. Raja Kumar—whose resume reads like former civil servant, SEBI regional director, executive director of UTI Mutual Fund to starting UTI Ventures in 2000—is now on the road to raise a third fund. In a wide-ranging interview with VCCircle, Raja Kumar talks about the changing LP-GP power equation and the challenges in raising funds from retail investors. Excerpts:-
Can retail investors be a big source pool of funds for PE investing?
The first goal of any General Partner (private equity manager or GP) is to raise money from sophisticated limited partners (LPs or investors) who understand this alternative asset class and give you the full window of time to invest and exit. In a typical LP–GP model, if your track record is good, the concept of “once an investor always an investor” works.
But, in the case of retail investors, irrespective of the performance, it depends on their ability to commit again. I am not sure if many people are aware that they have to share 20% returns with the manager. Besides, fund administration becomes cumbersome because of the larger LP base.
I believe that PE is a business of the LPs, by the LPs, for the LPs.
If retail investors are aware of this asset class and can commit a minimum threshold of Rs 5 crore or more, it might still be feasible. But, the bottom line is why raise retail money if long-term LP money is available.
What do you think of the emergence of domestic LPs?
The emergence of domestic LPs--banks, institutions and family offices--is long overdue. UTI, LIC and some banks have been investing in PE for over a decade and their experience has been good. Regulations are clearer and lack of liquidity is no longer a concern with a good secondary market. I expect the domestic LP base to provide a sustainable source of funds to domestic PE fund managers.
LPs back funds with a good exit track record and you are certainly the king of exits. Have you done any exits this year and what should one keep in mind?
As we are the first institutional investor, we deploy capital at attractive valuations in our companies. A lot of them have raised next rounds at higher valuations. We might have done 21 exits till now but some of them were small.
In Four Soft Ltd, we made 5X. In Excelsoft Technologies Pvt Ltd., we made 50X. We also went wrong in some exits like Subex where we were at 16X at one point. Perhaps we were greedy and we knew about the company a lot more. Now, we are 3X and we are still invested in the company.
One lesson that we learnt is that you need to have discipline. One should get out early if the business is not working and stick on with the winners. Our second fund is showing a lot of promise. In CCCL, we made around 5.4X. We are already 3X in Koutons Retail India Ltd and about 2-2.5 in Shriram EPC Ltd, we are holding on to these companies. We made 250% on Renuka Sugars in a PIPE (Private equity Investment in Public Enterprise) deal. The IRR was 60-70% on an investment made less than two years back.
What are the concerns playing on the mind of LPs?
One, LPs feel that India is a highly intermediated market. A venture capital deal here will walk into a PE fund through an intermediary. When there’s a smart intermediary, the deal is hyped up.
Two, as the public market bias is high, private market valuations are derived from those benchmarks. Three, entry valuations are high. Four, LPs are not comfortable with PEs focussing on public markets. They expect you to identify private companies, grow them, and find an exit.
How do you think the changing LP- GP power equation will play out for the industry?
The overseas pool of capital will dominate for some more years. So, it is important to possess a good exit track record for GPs. I expect a lot of fund managers to go away from the radar of LPs. I don’t think there is room for 300 GPs. Also, LPs are seeking more commitment to the fund from GPs. Earlier, we were not committing any money but now we are made to commit 1%. When I launch Fund IV, I expect the minimum commitment would be 5%. So, one needs to reinvest the carry (private equity manager's share of the profits made on investments) because you need to have the skin in the game.