The Year that Was: 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. She is in the middle of raising a new fund. 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.

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. 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.

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.

Investors in ICICI’s funds and employees thought the team deserved more of the profits the team was making. Ramnath managed to convince ICICI Bank to share the profit or “carry” with the team that was making the investment.

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 Deshpande and Srinivasa quit. There are two 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. When you can make that much, you always think you can make some more from your skills.

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 RBI don’t like depositors’ money being deployed in high-risk private equity.

All this has resulted in many banks exiting this business.

It is here that Mulye is actually tweaking the model for India by getting ICICI Bank to contribute more to ICICI Venture. ICICI Bank’s reassuring presence will surely help her in raising the required amount of funds.

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. These steps will help her build the institutional persona to ICICI Venture’s private equity team. Mulye thinks she has the team she needs.

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?” she says.

- This article was earlier published in Forbes India magazine dated October 23. 2009.

WHY DID WE DO THE STORY
Between 2004 and 2009, ICICI Ventures became one of the most formidable private equity firms in India. Its head Renuka Ramnath typically bought majority control in companies that she invested. And then in the aftermath of the economic upheaval, one of ICICI Venture’s investee companies, Subhiksha, blew up. Ramnath quit soon after. The blow-up seemed to be the ostensible reason. But as we dug deeper, there appeared to be a larger pattern. This was the second time the entire top team of ICICI Venture had left the fund. We found that the reason was a troubled parent-child relationship.

ICICI Venture had made its senior team very entrepreneurial. The team wanted a better share of the money that they were helping to make than what ICICI was ready to part with. In fact, we found that this issue was affecting many institution-owned private equity funds. Second, it was also becoming increasingly difficult to retain fund managers who wanted to strike out on their own in pursuit of greater operating freedom and better compensation. Our story captured these internal dynamics of the private equity industry with ICICI Venture being the case in point.


WHERE DOES THE STORY STAND
2010 has brought in some interesting changes. The markets recovered and the risk appetite, especially towards a market like India, has improved. Renuka Ramnath, launching the maiden fund after she went on her own, has managed to raise $300 million. Now another group of professionals has quit ICICI Venture. Jayanta Bannerjee, Anand Vyas and Sunay Mathure are starting their own fund.

The industry is seeing more fund managers leave the institutional fold to start up. Raja Kumar, who had headed UTI Venture for many years, has raised $350 million for a new fund under Ascent Capital, in which UTI has a limited participation. P.R. Srinivasan, who was the head of Citibank Venture Capital International (India), has also put in his papers. He too plans to start a new fund.