Managing director and chief executive of UTI Ventures Management Co. Pvt. Ltd, Raja Kumar is adept at exits. In one of his best deals, Kumar recovered 50 times his firm’s investment in Excel-Soft Technologies Pvt. Ltd by investing Rs2.5 crore in 2001 and taking out Rs125 crore in 2008.
Kumar spoke in an interview about the changing power equation between limited partners (investors) and general partners (private equity managers). Edited excerpts:
On the money: Raja Kumar says he doesn’t think there is room for 300 general partners. Rajkumar / Mint
What are the concerns of limited partners (LPs)?
One, LPs feel that India is a highly intermediated market. A venture capital deal here will walk into a PE (private equity) 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 focusing on public markets. They expect you to identify private companies, grow them and find an exit.
Can retail investors be a big source pool of funds for PE investing?
The first goal of any general partner (GP) is to raise money from sophisticated limited partners 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% (of their) 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 Rs5 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 Asset Management Co. Pvt. Ltd, Life Insurance Corp. of India 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.
How do you think the changing LP-GP equation will play out?
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.
What should one keep in mind when making exits?
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 (five times the investment made). In Excel-Soft Technologies, we made 50x. We also went wrong in some exits like Subex Systems Ltd, 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 (Consolidated Construction Consortium Ltd), we made around 5.4x. We are already 3x in Koutons Retail India Ltd and about 2-2.5x in Shriram EPC Ltd. We are holding on to these companies. We made 250% on Shree Renuka Sugars Ltd in a PIPE (private equity investment in public enterprise) deal.
Content from VCCIRCLE