New Delhi: The private equity arm (PE) of Axis Bank Ltd, Axis Private Equity Ltd, which is on the road to raise the second close (additional commitments) for its fund, is facing some serious concerns from limited partners (LPs) or institutional investors. It is targeting $200 million (Rs924 crore), higher than the $150 million it raised for its first close. This is not the first time a captive PE arm is making itself independent of the parent. UTI Ventures, which began as a part of UTI Bank, recently renamed itself Ascent India Capital Advisors. In an interview with VCCircle, Alok Gupta, managing director and chief executive officer, Axis PE, talks about the concerns of institutional investors or LPs, restructuring and plans for the year. Edited excerpts:

Big plans: Gupta says Axis PE will focus on fund-raising this year.

What is your assessment of the market now?

India is the only market where there is no illiquidity discount for PE, unlike in the West. There is a huge valuation mismatch now though we are seeing some interesting deals. We are growing at over 100% on some of our portfolio companies and are receiving offers in the range of 3x-4x (returns). We might look at some part exits. This year, we will focus mostly on fund-raising. We raised $150 million as the first close in 2008 and are now looking at a second close for the fund.

How is the fund-raising coming along?

We are facing some challenges and working on resolving some of those. Our LPs feel that there exists a conflict of interest between us and the bank, despite having one of the most independent structures among captive firms. This is limiting our universe of LPs.

What are their primary concerns?

They are concerned about how much independence we have as a PE arm of a bank in decision-making on our potential investments. About 40% of the commitments of Axis Bank currently are in infrastructure-related service companies, and it is also the dominant theme for us [the PE arm has till now invested in five companies: Vishwa Infrastructures and Services Pvt. Ltd (Rs60 crore), railway line manufacturer Harish Chandra India Ltd (Rs126 crore), Neesa Leisure Ltd (Rs75 crore), oil and gas pipeline developer Corrtech International Pvt. Ltd (Rs67 crore), and renewable energy company Shalivahana Green Energy Ltd (Rs54 crore)].

We leverage the knowledge of Axis Bank to an extent that it behaves likes an investment bank for us—for deal sourcing or M&A (merger and acquisition) related activities. We have one of the most independent investment committees among all captives. We have an independent investment committee with an independent chairman.

How is the restructuring exercise coming along?

We have to get out of the label of being a captive. Some structures will have to be introduced. We are working with our legal counsel on that. The decisions are not final yet. In the US, UK and Europe, captives after hiving off from the parent entity have performed better. There have been many hive-offs in the West. CVCI (Citi Venture Capital International) out of Citibank, Affinity came out from UBS, Montagu came out of HSBC. Others include Morgan Stanley (Metalmark Capital), Deutsche Bank (MidOcean Partners) and Credit Suisse First Boston (Avista Capital Partners, Diamond Castle Holdings).

How supportive is the parent entity of the move?

The bank is pretty supportive as they are seeing the messages from the LPs.

As Axis Bank is a listed entity, how will the hiving off of the PE arm affect the bank?

Axis Bank is into a lot of things. The income is shared with the bank after all the expenses are met. It still forms the consolidated part of its balance sheet. Axis PE will have to grow in size and funds under management to have any significant impact on the minority shareholders.

What is your positioning for Axis PE?

We want to be seen as a PE firm with a good team making good returns for the shareholders. We will grow from one fund to the second and so on.

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