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US consultant helps IDFC in weighing investments

US consultant helps IDFC in weighing investments

Mumbai: India’s first private equity (PE) fund, IDFC Private Equity Co. Ltd, signed on US-based consultancy Strategic Decisions Group International Llc (SDG) in the middle of last year to help it with strategic investment, risk management and creating value for shareholders.

The move was uncommon for an Indian PE fund, industry executives said, adding that if more funds took the same route, it could diminish the role of general partners, which raise capital from institutions and individuals for investment in companies and have the right to participate in their management.

IDFC PE has $1.3 billion (Rs5,928 crore) under management and is present in critical sectors such as power and ports. Chief executive Luis Miranda said it faced its share of challenges during the economic slowdown last year, and introspection led to hiring SDG.

“They helped us to rethink various decisions like if some of the deals not done before, should we have looked at them? Or, how could we have done our deals differently," he said

“It is unusual for PE firms to appoint consultants," said a fund manager who did not want to be identified as he was commenting on a rival fund. “Typically, a company would appoint a consultant to discuss its business strategy."

Jagannadham Thunuguntla, equity head at New Delhi-based investment bank SMC Capitals Ltd, said global funds, however, do fall back upon consultants.

“Many global funds use the help of strategic consultants when they have large portfolios or when they don’t have the local dynamics needed to run the business in a particular region," Thunuguntla said.

But he added that if PE firms start hiring more consultants, general partners will be reduced to the role of syndicators that bring together investors, portfolios, lawyers and companies.

IDFC PE has made 30 investments in India since its creation in 2002. In 2009, after looking at 200 deals, it invested in just two.

Fully owned subsidiary Green Infra Ltd bought the wind power assets of BP Plc in India for $134 million in September, while the parent firm invested Rs300 crore to finance the merger of Quippo Telecom Infrastructure Ltd and Tata group-owned Wireless TT Info Services Ltd in August.

“Since deal closure was a challenge due to high valuations in 2009, we focused on exits," said Miranda.

IDFC PE has exited four companies since last year, but Miranda declined to name them as they were private deals.

“In three companies, we sold our stakes back to the promoters at multiples twice the value (of investment) and sold a small stake to a new investor in the company at thrice the value," he added.

The last calendar year was admittedly tough for PE funds. Just 232 deals worth $3.8 billion took place, against 441 deals worth $10.2 billion with 2008. But 2010 looks better, with PE funds already investing $1.48 billion in 38 transactions, according to Venture Intelligence, a Chennai-based research service focused on PE deals and mergers and acquisitions.

Miranda also said that with 40% of its $700 million Fund III already committed, IDFC PE’s focus in 2010 will be a mix of investment and exits. “Power and roads are the two sectors that we are looking at now, while two of our companies are lined up for IPOs (initial public offerings)."

Ashoka Buildcon Ltd and Gujarat Pipavav Port Ltd—both firms in which IDFC PE has invested—have filed their draft red herring prospectus with market regulator Securities and Exchange Board of India.


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