Buyout of a Buyout Fund: The curious case of India Equity Partners

Sometimes a webpage can tell you a lot. The home page of India Equity Partners says it is under renovation and under the contact us hyperlink, is present just one name: Sid Khanna. The quiet office of the fund at CG House in mid-town Mumbai and the rather barren looking page conceal the power struggle that has resulted in 3 founders of the this private equity fund to detach themselves from its daily operations. Steven Wisch, the prime mover behind the first IEP fund, will remain an advisor to IEP but Anurag Bhargava and Gaurav Mathur both will sever ties with the fund. This leaves Sid Khanna, the man who built the Andersen Consulting (later Accenture) business in India, as the head of the fund.

Wisch, Bhargava and Mathur had bought in Sid Khanna and KK Iyer as the operating experts in 2008. IEP wanted to do “control” transactions, basically buying more than 50% of small companies, with the aim of putting effective management, processes and capital to grow these small companies rapidly. The irony takes a cruel turn because it is now Sid Khanna and KK Iyer who have the control of this fund that does “control” transactions!

“The fund is going through a transtition phase. The changed business situation requires us to right size and we are doing that,” says Sid Khanna. He is seconded by Steven Wisch. “Paraphrasing the famous American author Mark Twain, the reports of IEP’s death are greatly exaggerated.  The Indian private equity market is going through tremendous change.  There is too much money chasing too few good deals.   The macroeconomic environment is weak and will likely get weaker and the political environment is uncertain and volatile.  We are doing what any good company would do in this environment.  We are right-sizing our business and preparing for long-term success.  I will be moving into a senior advisory role,  Gaurav Mathur will be setting up his own business and we have a strong team in India led by Sid Khanna and KK Iyer."

At $350 million dollar fund size IEP may not be a big fund but it is perhaps the first fund to see such a change. In the past funds have shutdown because they could not raise a second fund – eVentures, Jumpstartup – but never have the founders left a fund, which they raised, so abruptly. Especially, after they have managed to raise some amount for the second fund. Nobody remembers another such instance in India.

There is a belief that goings on at IEP are because of it could not raise its second fund of $500 million. And the reason they could not raise the second fund is because they haven’t made good returns. Both reasons are false. IEP has already raised $100 million. They have had 3 exits till date. IEP has made 6.5 times the invested capital in Manappuram Finance and 3 times their money from exits in Bajaj Auto and Ikya, which is an HR outsourcing company.

The real reason for the split is because of a disagreement between the founding team, comprising largely of finance industry professionals and industry experts that the fund hired later. The operating guys were brought in to fix the businesses bought by IEP in “control” transactions.

Wisch disagrees with the hypotheses. “There has never been any difference between Sid and me regarding IEP’s strategy.  Sid and I have also always agreed on creating a long-term business that would succeed and thrive long after the two of us have moved on and thus we have focused on hiring and cultivating outstanding individuals and building a culture of team work and excellence.  Of course, as we focused on right-sizing our business for long-term success, we had lively internal debates about how to proceed but that is normal healthy partner discussion,” says Wisch.

Dissent is par for course in a judgment related business such as private equity. What is extremely rare is founders leaving just when the fund has started to return money to its investors. Some of the investors in the fund recall that this is the same team that had said they were fully committed to IEP while doing the road-shows last year to raise the second fund.

India Equity Partners raised their first fund of $350 million in 2006. The fund mostly took small stakes in companies. For instance, they invested in Manappuram Finance, Amtek Auto, Ocean Sparkle in those days. By 2008, the market for venture funds had mushroomed to more than 100 funds. The competition for  deals was intense. Investment bankers were routinely putting funds through an auction exercise to get the best price for their clients making funds overpay. (It is not surprising that most investments made during 2007 will not return a profit today).

To differentiate themselves from the pack, Wisch, Bhargava and Mathur decided to get into control deals of small companies. They brought Firdaus Vandrewala, who was then at the helm of Tata Power, Suresh Mathur, then with Gujarat Petronet. They also brought in Sid Khanna because of one of the senior members Akash Mehta, who left IEP later, knew Sid Khanna.

Sid Khanna had hung up his boots by then after a long stint with Accenture. He had grown the India business Accenture (then Andersen Consulting) from one employee to the force that it became later. He was also the guy who had advised Naresh Goyal on the strategy for Jet Airways when it was a fledgling company. He had advised General Electric when they created the GEICS, which became Genpact later.

While Vandrevala and Mathur were more of advisors, Sid was the guy was willing to roll up his sleeves and get down to work with the companies where IEP had invested. He also knew virtually everyone in corporate India and so could open doors. Initially, the equation between finance chaps – Wisch, Mathur and Bhargava – and Khanna worked well. Wisch, who as then 47, was accepted as the natural leader of the outfit because it was his US network of investors that had put money into the fund.

The equations began to change later during 2011 and 2012 when the team hit the road for raising the second fund. This time more of fund raising was being done also in Asia rather just in US alone as was done for the first fund. The new “control” driven strategy and Sid Khanna’s Accenture credentials had a bigger resonance than Mathur, Bhargava or even Steven Wisch. This was only to be expected. If the fund was buying businesses, improving its processes and therefore financial results then Wisch, Mathur and Bhargava did not have that experience. Sid Khanna and KK Iyer  -- also a former Accenture man – were the guys who had done the hard yards in improving companies.

As Sid Khanna’s stature grew so did his say in various things in IEP. The most critical area in any private equity fund is the investment decision. It has to be done at the right price and in a right sort of promoter. It is here that disagreements began to happen. Earlier, while Sid would express his opinion in the investment committee the weightage of the opinion of the financial types reigned supreme.

With the change in strategy Khanna and KK Iyer became more assertive because it would be they who would have to roll up their sleeves and improve the company. Only then could IEP exit the investment at a good profit. Given that the new fund was still being raised and there were quite a few firms – Innovative Foods,  Sagar Ratna Restaurants, TNT Express --  who need the sort of advice Khanna and specialize in, it was clear who had to leave the fund and who had to stay.

“Look life goes on. Sid Khanna is no longer in Accenture but does that affect Accenture? Things happen but you have to move on,” says Khanna. Now that he has a clear mandate at IEP, all his investors will be waiting for profitable exits from all the control transactions in 3-4 years time. If Sid Khanna can deliver that then the history of IEP will be remembered differently.

The thoughts and opinions shared here are of the author.