Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

What drives PE fund managers to go solo?

Indian private equity (PE) firms go through bouts of separation every now and then when one or more managers leave them to set up their own firms

Indian private equity (PE) firms go through bouts of separation every now and then when one or more managers leave them to set up their own firms.

The latest examples include Vishal Bakshi, former India MD at Goldman Sachs, who is setting up his own PE firm, Avatar Growth Capital; Siddharth Parekh, the younger son of Deepak Parekh, chairman of mortgage lender HDFC Ltd, who has left UK investor Actis after a seven-year stint in its Mumbai office to form Paragon Partners and is now on the road to raise a $200 million fund; former Footprint Ventures co-founders Josh Bornstein and Peter DeYoung, who are setting up a $50 million fund, Montane Ventures, which will be anchored by Ajay Piramal.

They join a long line of PE managers who left established firms to venture forth on their own.

The trend started with Renuka Ramnath and Ajay Relan, arguably the two most successful independent fund managers in the Indian PE industry. Relan, who managed Citigroup’s private equity operations in India, left the firm in 2009 to set up CX Partners, which raised $500 million in its debut outing in then one of the largest first-time funds by an Indian.

Former ICICI Ventures CEO Ramnath made a big-bang entry in 2009 by raising $350 million for the debut fund of her independent shop Multiples PE. Renuka and Relan were able to successfully raise capital and also grab their own share of deals. Their success and that of a few others may give the impression that so-called independents have it easy.

This is far from the truth. Not everyone has had a great solo journey.

Many have not been able to raise any money at all. Some have managed insubstantial fund raises and run sub-optimal PE firms (in terms of fund size). This makes it difficult to hire talent and also win deals in a hyper-competitive environment.

Subbu Subramaniam, who left New Delhi-based Baring Private Equity Partners to set up his own firm in 2010, raised only about $60 million in his debut fund, and has been dabbling largely in public market deals. Rajesh Khanna, former India head for Warburg Pincus, threw in the towel after a nine-month effort to raise $400 million for his debut fund.

Of course, there are exceptions such as Manish Kejriwal, former India head of Temasek Holdings, whose Kedaara Capital successfully closed its maiden fund with a corpus of $540 million in 2013.

Given that success isn’t guaranteed, what drives PE fund managers to go solo? One is the market opportunity.

India is one of the fastest growing markets in the world and there is a need for home-grown managers who understand the market much better than their foreign counterparts.

Second, there are many good companies and sectors which do not fit in with the existing mandates of PE firms, frustrating some of these managers and prompting them to venture out on their own.

The third is economics. These fund managers have already made some money and see “entrepreneurship" as the next stage of career and financial growth for them.

It remains to be seen if the optimism of the newbies is shared by the limited partners (LPs) who will ultimately write the cheques.

Much of the optimism is based on the seemingly improved appetite for investing in India and may be premature as the perennial India-specific PE problems are still alive. India has an ever-increasing overhang of assets waiting to be sold.

The inability of GPs (general partners, who manage the funds) to exit profitably has been further compounded by the depreciation of the Indian rupee against the dollar.

Besides, LPs are wary of breakouts as they see it as a “failure of alignment" among GPs or as a “betrayal of trust" as they invest behind teams.

The early supply of “entrepreneurial" fund managers came from institutional investors such as Citi or ICICI Ventures or Temasek and LPs accepted them immediately.

But they are concerned about “team stability" when executives leave “entrepreneurial" shops such as India Value Fund or Baring India. When partner-level fund managers walk out of established firms, it reflects poorly on everyone.

Based on my conversation with LPs, there are a few things which fund managers hoping to do their own thing should focus on.

For one, it’s extremely important to get the team right. Investors like to see a new team broadly working on the same things that it has worked on in the past.

The team should also have an impressive track record (increasingly, LPs are doing multiple reference checks as well as stringent due diligence, even more so in the case of first-time fund managers).

The fund managers would also do well to have a highly differentiated strategy. It also helps for such managers to have skin in the game.

A commitment to a fund from a company’s own partners is an expression of confidence in the offering. A 10% GP commitment gets immediate attention.

Some smart fund managers are also choosing the non-fund approach. These first-time managers are employing a deal-by-deal financing model to pay for acquisitions before attempting to raise a fund. Those who have mastered this art include Rajeev Gupta (former head of Carlyle India) and Amol Jain of Arpwood Capital.

Most importantly, LPs want GPs who can repeat or institutionalize success, build consistency, legacy and an institutional framework, and incentivize and motivate their teams. They prefer those who want to win over others who merely want to close deals.

Shrija Agrawal is Mint’s deals editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.

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