Bangalore: Private equity firm UTI Ventures’ management team, led by chief executive Raja Kumar, has formed a new, separate investment entity. Called Ascent Capital Advisors, the firm is owned by Kumar and his team and will have a corpus of around $400 million (around Rs1,850 crore).
Spin-out arrangement: UTI Ventures’ CEO Raja Kumar. Ascent Capital will be owned by Kumar and his team and have a corpus of $400 mn. Rajkumar / Mint
Ascent Capital’s formation may be a precursor to UTI Ventures’ eventual exit from the private equity (PE) industry, underlining a trend in which management teams are seeking to go independent either for a greater say in decision-making or bigger share of profit.
UTI Ventures, the investment arm of UTI Asset Management Co. Pvt. Ltd, is one of the older PE institutions in India and counts Koutons Retail India Ltd, Zylog Systems Ltd and Ramkrishna Forgings Ltd among its portfolio companies.
Ascent has begun raising funds and is hopeful of completing the exercise in a year. “In PE world, boys become men very fast. Naturally there is an aspiration to own the firm and find their own destiny,” said a UTI Ventures senior official who didn’t want to be named, citing company policy.
Had UTI not agreed to the arrangement, the team would have left, bringing the firm’s investment business to a standstill, the official said.
UTI Asset Management has a stake in Ascent Capital, but that would gradually decline as capital infusion starts from other sources.
With 19 firms in its portfolio currently, UTI Ventures has so far made 21 exits. One of its most successful exits has been from Excelsoft Technologies Pvt. Ltd, where it earned a return of 50 times its investment.
UTI Ventures management is doing what is called a “spinout arrangement through transitional model” in the PE business.
Under this model, an existing team slowly transits into a new entity, but after fulfilling commitments of the parent firm. Also, the parent firm may continue to hold some stake in the new business.
In Ascent Capital’s case, the team would continue to be associated with UTI Ventures and manage the firm’s existing portfolio and investments from its latest, third fund, which could mean being associated for the next two years. This spin-out model saw the creation of India Value Fund a few years ago from GW Capital.
Investors are becoming more comfortable with supporting new independent teams while a share in profit is also encouraging PE partners to become independent.
Typically, 20% of the share in profit goes to the managerial team. However, in the case of affiliated or captive funds, most of the profit will go to the institution which owns the PE company and a small fraction to the partners, who are more often than not treated as employees.
“There could be differences on operational flexibility, professional aspirations and investment approach. Any one or a combination of these factors can lead to the departure of a partner from a firm,” said Lightspeed Advisory Services India Pvt. Ltd’s former country head Srini Vudayagiri, who is all set to start his own investment fund investing in both venture and private equity deals.
Limited partners (or LPs, investors who typically have no say in the management of the partnership) see this movement as a gradual progression of the PE business in India.
“As LPs we applaud this move. I see that now the corporations and the employees within those corporations have also started realizing that PE needs to move on and assume a natural form which is that of a partnership,” said Anubha Shrivastava, managing director, Asia CDC Group in London, which is backing Ascent Capital.