Even as many private equity (PE) funds are struggling to find exit routes for their investments, ICICI Venture Funds Management Company stands apart. India’s largest homegrown PE firm, which has verticals like real estate and special situations, has made 51 exits (including partial exits)—cumulatively worth $1.3 billion (around Rs 8,793 crore)—since 2009. The bulk of the deals clocked an internal rate of return (IRR) of about 20 percent. The firm, which has nearly $3 billion in assets under management (AUM), is now creating a platform for the power sector, in partnership with a strategic player. It is also looking to raise a fourth PE fund and a third real estate fund. Forbes India met Prashant Purker, who was promoted as managing director and chief executive of ICICI Venture Funds in December 2015, to understand the firm’s strategy. Edited excerpts:
Q. With you at the helm of ICICI Venture Funds, can we expect any changes in strategy?
There will be a good amount of continuity as I was on the board and I have been part of the setting up of a few new practices. The broad strategy will not change. We will carry our firm to greater heights. What we have done in the last few years is create a vibrant platform, multiple practices; today we have four clear verticals [PE, realty, power and special situations].
On the PE side, we have three funds and we are raising the fourth now. We are getting good traction for it. We have the real estate vertical, where our second fund has been fully invested; we will now look to do a successor fund. The special situations fund is something we started with Apollo and it did very well. The maiden fund attracted a record subscription. It’s $825 million (around Rs 5,580 crore) and if you consider the co-investments, its AUM is nearly $1 billion. We have also made solid progress on the power platform, and soon you will hear some concluding things around that.
The core practices have grown well. Our endeavour is to add more dry powder [cash reserves].
Q. Can you tell us more about the power platform? And what is the need for such a platform?
Essentially a platform is a vehicle that can be structured as a company that controls and owns assets. This will not be like a minority investment, which PE firms typically resort to. These are buyouts; there is a management team. For the power platform, there will be an operations and management team… these are fully-grown companies that own assets. These models work very well when companies can generate large streams of cash. You can do this around power plants because utilities can become large cash generators. In utilities, you can do solar as well as other things. It’s similar to Real Estate Investment Trusts (REITs) for commercial projects. REITs can add and sell assets. Power companies that can become large are ideal for us. We will have a sponsor of the platform and then there will be other shareholders who will be direct investors, which is where the bulk of the capital will come from.
Q. Power investments have not lived up to expectations as far as returns are concerned. Then why the interest in the sector?
Greenfield [power] projects have their own challenges. Typically, on the platform, there would not be any investments in greenfield [power] projects. So, we will not start buying land, setting up equipment, etc. For us, investments will be in bought-out assets that are up and running. Hence, project risks will be lower than in greenfield projects. Certain projects that were started earlier could become good opportunities. We can provide exits to early investors. For a platform, you can’t have just one asset. It must have multiple assets and substantial capital. We will have a large strategic player as our partner... between us there will be enough expertise.
Q. ICICI Venture Funds has been consistent in exits.
We had 51 exits since 2009 and $1.3 billion returned across all platforms. The year 2015 was a good one; we did eight or nine full exits and a similar number of partial exits. Our limited partners (investors in funds) will realise that we have performed strongly and that too across practices. Even AION Capital Partners (a strategic partnership with Apollo Global Management) had a $235 million exit. For our third PE fund, which is of late 2009 vintage, we have already had two exits with nearly 30 percent IRR.
The reason for that is that we relied on the capital market for an exit in only about 35 percent of the cases. We have utilised multiple strategies; we go beyond waiting for capital markets for exits, we do secondary deals (PE funds buying stakes from each other) and strategic sales also. There is a strong exits and investments pipeline. In the last six years, we have delivered robust exits. Some of our investments are maturing now. AION may have some more coming in; the real estate fund, too, would have some.
As far as returns go, in AION, the exit we made is with 35 percent IRR. If you look at our second real estate fund, where we have exited over 50 percent of the portfolio, we garnered a 23 percent IRR. We are delivering along expected lines. The next real estate fund is yet to be launched; the product is being designed. For the fourth PE fund, we are looking to raise $400-500 million.
Q. How is your mezzanine fund working out?
Mezzanine is really a subset of our special situations fund. We did it more as a proof of the concept using debt instruments. Today, it has emerged as a full-fledged AION where we have a world-class partner with the best track record. The special situations concept is now well proven for us. When we started it three years ago, people asked us if it would work.
Mezzanine has emerged as a large special situations platform that has carved a place for itself. Structured investments with both debt and equity angles are more prevalent today; even regulators allow a lot more flexibility with structured deals. A lot of deals today have a good amount of structuring and it happens in both PE and special situations.
Q. Why have we not seen you investing in the so-called new economy businesses [companies whose business models are heavily linked to the internet]?
It’s a very exciting thing that is happening. The only thing is that if you see the nature of some of these new economy businesses, the pipeline comes from the venture capitalists (VCs). Today, a lot of these VCs have the ability to fund in the later stages as well. We fund growth, however, we don’t have a ‘pick a winner’ strategy because, for that, you need a really diversified portfolio with multiple bets and we don’t manage that type of money. For such businesses, you can’t say I will do just one deal. In a sector with a high burn rate, one deal won’t be good for your investors and will not be true to your mandate. For us, it makes sense to look at companies that support these businesses… related to technology, data mining, logistics and warehouses. We have certainly looked at many transactions and as and when we see an interesting deal, you will see us doing that.
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(This story appears in the 19 February, 2016 issue of Forbes India. To visit our Archives, click here.)