Mumbai: After an 18-year private equity (PE) career with two foreign banks’ PE funds in India—Hongkong and Shanghai Banking Corp. Ltd (HSBC) and Citi Venture Capital International (CVCI)—P.R. Srinivasan last week followed in the steps of his former Citi boss Ajay Relan and stepped down to start his own fund. He plans to raise a $400 million (Rs1,844 crore) agnostic general purpose fund with an upper limit of $500 million. The team, comprising four to five partners, will have a plan ready by November.
The fund will focus on investments between $25 million and $40 million in companies that are aiming to jump a couple of levels and are going through a risky phase. “It’s in that risky phase we want to be a large shareholder in it and be a part of how the risk reward process is managed,” Srinivasan said in an exclusive interview. Edited excerpts:
You are one of a group of managers who have a lot of experience working with PE funds in India. How different is it now from when you started 18 years ago?
It is interesting to note that the Indian market had no credible people with India PE experience and HSBC chose to rely on expats to start one. I suppose today such a thing will not be conceivable, because there is enough talent with India experience. The amount of local talent is a big change over the past 15 years. In 1995, almost all India funds were sponsored. The Lps (limited partners, or primary investors in a fund) were looking to see if an HSBC was sponsoring and willing to be an anchor investor to consider it seriously. HSBC gave us an $8 million sponsor commitment to set up an India fund. Today you don’t necessarily need a sponsor—independents with track record are credible.
In 1995, the pitch was that HSBC had been in India for over a century, they have local branch network, they are sponsoring the fund and we can do deals. Some of the Lps found it interesting and gave us money. We raised $60 million, which was a big amount in those days. Today (the) market has grown to a stage where you have one deal for $200-400 million. Deal sizes have increased, so you are able to deploy more money.
Next step: Former CVCI head P.R. Srinivasan plans to raise a $400 million agnostic general purpose fund.
If there is no dearth of money for PE funds and talent is plenty, why did you leave?
I would have gone with Ajay Relan in 2008. But I chose not to for various reasons. I got the opportunity to head the business and navigated it through a very tough period, including the Lehman crisis.
My career started with investing Rs20 lakh for TDICI Ltd (now ICICI Venture Funds Management Co. Ltd) in Microland in 1992 and had grown to leading a syndicate for a $200 million transaction in Sharekhan, which was my biggest deal. In Citi, I had led or participated in investments of over $650 million—investments that returned over $1 billion and outstanding portfolio value of $600 million. So, I am 45 now and I thought this was the time to try setting up an independent fund management business. Ajay Relan told me how he wishes he had done it when he was 10 years younger.
How tough was it in 1995 to raise a fund?
In 2006-07 anybody could raise a fund—the market was very conducive. Things have changed now: In 2009–2010, not everybody can raise a fund. PE is a “we” business and not an “I” business. If I manage to get the kind of people I want into a team then the task is feasible.
In 1995, political conditions were quite complicated. It was the time of the Enron saga, so most of the investors we spoke to worried that India was treating Enron badly and foreign investment through an India fund may also suffer. That was the major issue. So, it was a very tough time to go and sell the India story.
Today, you don’t have to sell the India story—you have to sell your story. Today, there is enough track record and independent fund managers are a viable proposition. In 1995-96, some other funds were also raised. They were all sponsored—those days you needed to have somebody give a chhaap (stamp).
Then you had the second phase, which was the tech boom where IITs (Indian Institutes of Technology) became more premium than HBS (Harvard Business School). In this phase—when first independents were being set up—NRI (non-resident Indian) professionals with US track records were returning home to set up funds: Ashish Dhawan (ChrysCapital Investment Advisors) and Sumir Chadha (then Westbridge Capital Partners and now Sequoia Capital India) were successful in raising capital. Now we have come to the third phase where teams are raising money based on India track record of the past 10 years. So, CX Partners raised capital ($515 million).
What will be the composition of your PE team?
One of the key things in running a PE firm is to avoid group thinking. You don’t want a bunch of guys who think the same thing. So, the team will have diversity of backgrounds, skill sets and thinking. You need an engineer with an MBA (master’s in business administration degree) and a BCom (bachelor of commerce) graduate with a CA (chartered accountancy degree) and a professional who was running a company. Increasingly, professionals with business backgrounds, including former entrepreneurs (as compared with people like me who are financial analysts) are coming into investing. So the team will have people like that as well.
What kind of deals do you intend to invest in?
Our focus would be to do $25-40 million deals, let’s say average deal size of $35 million, so probably do 12 deals if we raise a $500 million fund or 10 deals if we raise a $400 million fund.
Is this a conscious decision? In the above-$50 million space, there is lots of competition.
Above $50 million you have a lot of competition. You have CVCI, Kohlberg Kravis Roberts and Co., The Blackstone Group, Bain Capital Advisors, TA Associates Inc. and Apax Partners etc. If you break up the market, then there are 25 funds who do below $50 million and 25 who do above $50 million. So, say if there are 100 deals in the market, 25 deals will be above $50 million and 75 will be below $50 million. So which place will you want to be in? Are you going to be in the space of 25 deals and 25 funds chasing them or 75 deals and 25 funds chasing them? So the less than $50 million space is competitive, but not as competitive as the above-$50 million space.
The investor community (Lps) is now willing to give more money to funds. How have they evolved over the past two decades?
The Lp community interested in India has become broadbased. There are two categories of Lps that were avoiding India, who are now active in Indian funds—some large Lps couldn’t invest in India in the ’90s because they wanted to make large investments, $50 million or more (without becoming more than 25% of the fund), and Lps who wanted to invest in independents. As funds have become larger and independent options are available, these Lps have become active. Some Lps don’t like sponsored funds. Secondly, it’s more ideological. Sponsors usually take some part of the carry. So if the carry is 20%, say 8% would go to the institutional sponsor and 12% would get distributed among the employees. Some Lps want the carry to go exclusively to the team. With the advent of independents, Lps avoiding India are looking at India seriously.
Today, what are the factors that Lps are looking at?
Lps are looking at team stability. They want to be sure that the team will stick together. So, they look at team dynamics. The India story is well accepted. We expect that 15% of our pitches will result in Lps taking the fund through due diligence. The process of due diligence takes at least six-eight weeks, if not more, because they want to see the real you and not a choreographed script they hear when you are pitching.
PE funds now have many options such as public companies and private companies driven by entrepreneurs. How will you view risk in your investment strategy?
Even listed companies are backed by entrepreneurs. The way we would like to define our business is that we would like to look at businesses that have created the foundation that will enable them to leapfrog from stage A to stage D as opposed to growing gradually from stage A to B to C and then to D.
If the company is in the mode of jumping a couple of levels then it’s going through a risky phase. So, if it’s in that phase we want to be a large shareholder in it and be a part of how the risk reward process is managed. In such a situation, whether that company is listed or not doesn’t matter.
Have you thought of a name for the new fund?
We have shortlisted four names. I have hired a firm to help us with the corporate branding and marketability.
Valuations of companies are playing truant with PE funds. Some PE investors say that earlier they invested at price-earnings multiples of 5x and 7x, but now is a time where you have to invest at 17x–18x as the market is overvalued.
It’s a matter of judgement. If you look at track records in India—take the period 2003-05— everybody has a track record. It took no genius to make money. You invested at 7x and everything has since gone to 18x. So, it was like a rising tide lifts all boats. Now is where your judgement and experience comes into play. India is a stock pickers market, so in some places the 18x is justified and in some places it’s not. The 18x may reflect possibilities of big growth in the next four-five years. But this time if you buy at 18x and it’s the wrong move, it’s going to hurt you. And you should be prepared for some amount of turbulence. So, it’s not an environment where it is going to be slam dunk and easy to invest.