ICICI Venture Wants More Bank for its Buck

It has been six months since Vishakha Mulye took over as the CEO and managing director at one of India’s largest private equity fund, ICICI Venture. Things have kept her occupied. She is in the middle of raising a new fund. This is a Rs. 2,500-crore fund with an option to add another Rs. 1,500 crore if investor interest is strong. Then she has the task of rebuilding the team that was left weakened by the exit of senior executives like Renuka Ra­mnath, Shailesh Pathak and Shweta Jalan three months ago; and Bala Deshpande and Aluri Srinivasa last year.

Then there is the minor task of refining the investment strategy of the fund as well. But that’s one thing Mulye will find the easiest to tackle. “We will continue doing buyouts but we will also add growth investments. We think infrastructure will be big and then there will be opportunities when corporates hive off non-core assets,” says Mulye.

But her most challenging task will be to recover the satellite of ICICI Venture that was trying to gather escape velocity and dock it firmly with the mother-ship of ICICI Bank.

No, ICICI Venture wasn’t trying to break away — not a chance. It is just that when ICICI Venture made a transition — sometime in 2004 — from being a venture capital firm to a large private equity investor, perceptions changed. Investors in the fund thought they were now dealing with a local heavyweight a la Blackstone. Perhaps, so did the team members. In the last five years, ICICI Venture has done the most number of buyout deals. This is to private equity what the Tour De France is to cycling: A test of skill, endurance and psychological strength to last the distance. Only the biggest and toughest attempt it because the risk of failure is high.

Renuka Ramnath, whom Mulye succeeded, knew that to get a seat at the buyout table she had to have a purse fatter than what parent ICICI Bank could afford. To get that increase in fund size, ICICI Venture raised a large amount of money from third-party institutional investors. Ramnath was seen as someone who had taken a firm that managed all of $225 million in 1998 to the $1.8-billion mark in 2008, did the toughest deals and most importantly was making money on those deals. So if it walked like Blackstone and roared like KKR, it had to be fed like those beasts, in terms of compensation. That’s when the gap between the perception and reality opened.

Investors in ICICI’s funds and employees thought the team deserved more of the profits the team was making. In private equity business, investors pay 2 percent in asset management fee and 20 percent of the profits to the team that manages money (known in industry parlance as carry). This is a steep charge but it is paid because most of the investment is in illiquid, unlisted companies which would be hard for an insurance company or a public sector bank to invest in directly. This 20 percent profit then gets divided differently if the private equity firm is an extension of a bank, is a standalone fund or belongs to an insurer. Theoretically, how the 20 percent is divided should be of no concern to investors; they should take their 80 percent and be done with it. But then there is a thing called as “the alignment of economic interests”. And this is not the first time that ICICI Bank has had to deal with this. It goes back a decade, to 1999.

At that time A.J.V. Jayachander and Nitin Deshmukh used to be the key guys at the fund. Though fund sizes were really small, the largest was $52 million, all the four funds of that time made some great investments in companies such as Big Bazaar, Naukri, and Biocon which were then in its infancy. When these companies went public, ICICI Venture laughed all the way to the bank. Its funds had an internal rate of return (IRR) of more than 45 percent on the capital it had deployed. That was the good part.

The sad part was that ICICI Venture in those times had no system of carry (a share of the profits for the key team members in the fund).

 

The team of those days did put up a proposal to the then board of ICICI Bank but it was turned down. The key reason was that it was ICICI Bank’s own money that was being given to fund managers like Deshmukh and Jayachander. Since they had not been involved in going out and seeking funds, there was no question of giving them any share of the profits. The other reason was that the “carry” amount could have been close to Rs. 50-60 crore. “In those days, there was no way any ICICI employee was going to get any share of such a large sum,” says a former ICICI Venture employee.

Since 2000, when private equity business in India started to gather momentum, most key fund managers at ICICI Venture left. Deshmukh and Jayachander left for Dresdner Kleinwort’s private equity arm, which did not take off. Deshmukh then moved onto SEAF and now heads Kotak Private Equity.

Fortunately for ICICI Venture, K.V. Kamath, the then CEO of the bank, believed that ICICI should be a large player in this business. He brought in one of his hotshot managers, Renuka Ramnath, to manage the fund. Renuka herself had had a forgettable stint with ICICI Econet, which had invested largely in dotcom companies. Once she came in and raised almost $1 billion in third party money, she also managed to convince ICICI Bank to share the profit or “carry” with the team that was making the investment.

And from all accounts, the parent ICICI Bank agreed to keep around 40 percent of the 20 percent profits and shared the rest with the team. This is pretty much in line with what most bank-sponsored private equity funds charge. To be fair to the bank, institutions gave money to ICICI Venture because of ICICI Bank’s reputation. Those were the days when Renuka Ramnath, Bala Deshpande, Aluri Srinivasa, and Sumit Chandwani were yet to establish their investing track record.

But come 2006 and 2007, the buyout strategy that Ramnath had created started bringing home serious money and generating a large-sized “carry” pool. A year later, both Bala Deshpande and Aluri Srinivasa quit. There is always the chestnut of “better career prospects” to fall back on to explain the exits. (Forbes India’s emails and phone calls to Renuka Ramnath, Bala Deshpande and Aluri Srinivasa went unanswered.) Mulye says compensation is not an issue, as can be gauged from recent top notch hires. After all, the share that ICICI Bank takes is not very much more than what the parents of other bank-sponsored funds like CVCI (Citi) or Goldman take. For private equity arms of insurance companies like AXA or AIG, the parent takes an even larger cut, 50 percent of the total “carry”.

There are two other explanations, both interrelated and both offer a clue to what Mulye will have to do during her stint. One is that private equity managers are particularly ambitious. They were the original Masters of the Universe before hedge fund managers upstaged them in making money. Highly ambitious people always want more for their skills. A case in point is Pulak Prasad, key architect of the Bharti deal at Warburg Pincus. He left the venerable firm shortly after Pincus sold the investment. According to industry sources, Warburg made more than $700 million profits on that deal and Prasad was paid $15 million for his exceptional performance. When you can make that much, you always think you can make some more from your skills. Why share the carry if you can start your own fund and get a larger share of it?

That’s one reason commercial banks have always found it difficult to run a stable private equity business. Of course, the other reason is that bank regulators like the US Federal Reserve or the RBI don’t like depositors’ money being deployed in high-risk private equity. Institutions like Calpers or Harvard Endowment Fund don’t like conflict of interest in a bank-led model. For example, Chinese walls notwithstanding, there is always a possibility that private equity money could be used to retire bad debts of the bank in a particular company.

All this has resulted in many banks exiting this business. Citibank sold its buyout business in Europe, CVC International to Mike Smith. Even their emerging markets business like CVC India operates independently. CVCI’s head of India does not report to Citibank’s India head. Only JP Morgan and Standard Chartered are still playing in this business at a significant scale. But the biggest names in private equity business globally are all independents: KKR, Warburg Pincus, Blackstone, TPG and Apax.

It is here that Mulye is actually tweaking the model for India by getting ICICI Bank to contribute more to ICICI Venture. She is busy meeting investors and convincing them of the value of investing in an institution in addition to people. “Investors have been very supportive. Many are repeat investors. They have realised that there is value in ICICI Bank being associated with ICICI Venture. That will help build greater institutional strengths in ICICI Venture and therefore provide a better sense of security about their investment,” she says.

The current fund that she is raising is mostly from domestic institutions like Life Insurance Corporation and some public sector banks. ICICI Bank’s reassuring presence will surely help her in raising the required amount of funds. That’s a huge value-add, especially in today’s time when risk capital is hard to come by.

She is also ensuring that ICICI Bank’s relationships are used to ensure ICICI Venture’s current portfolio delivers value. For instance, in some cases it could mean doing an IPO of a company that may otherwise find it hard to list. Here, her previous experience of being the chief financial officer of the bank is coming in handy. Both investment banks and investors are willing to listen to her. Then, there are cases where ICICI Venture will need to average out its cost of investment in various companies and there too, the fact that ICICI Bank is now taking a more active interest in ICICI Venture, will only help her case.

Then there are spin-offs of non-core ICICI functions that are interesting investment opportunities. The planned divestment of ICICI Bank’s point-of-sale terminals into a separate company is equivalent to sourcing a deal.

All these steps will ensure investors and employees have no doubt that ICICI Bank’s shoulder is backing the ICICI Venture wheel. Having balanced the parent-child equation, she is now working on the child’s re-education.

One clear attempt to harness career aspirations is to create industry and expertise areas so that people feel a greater sense of freedom in their work. “We will be setting up verticals along sectoral lines. For instance, healthcare, education, infrastructure and financial services, etc,” she says. There will be wider competency areas like buyouts, deal structuring and capital markets. These steps will help her build the institutional persona to ICICI Venture’s private equity team, which is led by Mulye and her deputy Rajeev Bakshi (who has led Pepsi and Cadbury before joining ICICI Venture last year) and consists of five presidents and three directors, most of whom have been with the firm since 2001.

Mulye thinks she has the team she needs. “I think K.S. Jangbahadur [president] has a lot of expertise in software services while Prashant Purker who joined us from Nomura and worked at ICICI Bank earlier, has deep knowledge of financial services. Parth [Parth Gandhi, president] has principal investing experience in both Indian and US PE markets. So we have the building blocks in place not only to invest but also manage the portfolio actively and harvest value when the timing is appropriate,” says Mulye.

To be fair to Mulye, she has a tough job on hand and her approach represents the best possible course of action at the moment. The team of investment professionals still needs the ICICI Bank brand name. And they need a large enough space to prove themselves as fund managers. Mulye will have to ensure that while the bank gets its due, ICICI Venture people remain entrepreneurial and innovative because this is not project lending by a long shot.

Her biggest test will come in four years when many of her team members would have established themselves. Their market value will then be excellent. “Look, we are all professionals. Can we all say with a 100 percent guarantee we will continue to be where we are now five years from now? That’s difficult to say,” she says. After all, if you can get equally capable people to replace the ones who have left, there is no problem. The bank will always be around and then it will be, as the movie says: The Empire strikes back.