ICICI's $1.4 billion shopping basket

With an overflowing fund, ICICI Venture is foraying into realty, management buyouts and helping Indian companies make acquisitions abroad.

In what promises to be one of the most expensive addresses in Mumbai, any hope of striking a real estate deal is by invitation only. The staggering 65-floor luxury condo "" to be the tallest building in the country "" in upmarket Worli has all the ingredients of the ultimate dream house, the kind rapidly being bought up by the rich and famous in Dubai.

Such as your own personal pool with each apartment overlooking the Arabian Sea; or a squash court in the Club House; or even a Business Centre in the lobby for meetings when you couldn't be bothered driving across town to the office. Oh, and as many as six or seven parking slots with each apartment so that parking isn't an issue the next time friends casually drop in for a party.

The bill for this 6,000 sq ft of luxury? Let's just say you'll need to have Rs 15-20 crore by way of spare cash if you want to buy into one of Mumbai's most expensive apartments. Also, for the record, this is no construction major out to grab a slice of the inflationary real estate market. Instead, the project has been conceived and funded by a private equity fund making an ambitious foray into the realty business.

In the first development of its kind, ICICI Venture Funds Management has tied up with a local developer to invest Rs 250 crore (including the cost of acquiring the Glaxo office land on which the residential tower is to come up) to create this upmarket property. And the cash for the project will come from a $550 million realty fund, the largest in this sector, which the company has just floated with the intention of investing in the real estate market.

Already, ICICI is positioning itself as a significant player in the sector. Its target? To invest half the cash in the fund by the end of the year. A few weeks ago the company bid successfully with a local developer for a six-acre estate in Hyderabad's posh Jubilee Hill area for a whopping Rs 335 crore. It has tied up with another builder to develop a township on 250 acres of land in Hinjewadi IT City near Pune.

Over the next month, transactions on the anvil include a 20-acre property in Bangalore, 15 acres in Chennai, and a tie-up with a developer in six locations for land areas of over 25 acres covering cities like Indore and Vadodara. Phew!

To fund its aggressive ambition, ICICI is already thinking of raising more money in the space. Says Renuka Ramnath, managing director and CEO of ICICI Venture: "In the next two to three years we expect to raise another $2.5 billion in the realty space. Our expectation is to manage over $5 billion of real estate assets in the next five years."

But that is not the only area Ramnath and her team are putting their hearts into. Buoyed by the success of its India Advantage Fund, which returned 30-35 per cent on a compounded rate annually, the company has just closed a deal to raise over $1 billion for its India Advantage Fund II, the largest India-focused fund in the private equity market, from which it will retain $850 million.

At three times the size of the older fund, the new fund will focus on two key areas "" management buyouts, and assisting Indian companies to acquire companies abroad, for which it will retain 50 per cent of the corpus.

ICICI is also working on two new possibilities: a specialised infrastructure fund, and a mezzanine fund for companies that don't want to lose control and so offer a combination of debt and equity against money.

This week too it struck two deals "" one to take a minority equity positioning in GMR Infrastructure, which is developing airports; and to put in Rs 35 crore in Metropolis Health Services, which owns a chain of diagnostic centres.

More importantly, the new funds will give ICICI the cash for mega-acquisition deals of $300 million plus (its biggest deal so far has been Rs 260 crore), an area where it has been conspicuous by its absence so far. ICICI expects the large fund will help it up the size of average deals to $25-50 million.

Explaining the new focus of the fund, Ramnath points out: "The time is ripe for Indian companies to look abroad; as a fund, we want to help them to do so. Secondly, with restructuring in family businesses and corporates companies, they want to concentrate on core areas and sell others. That, again, gives us an opportunity to get in with management buyouts."

With over $2 billion by way of assets under its management "" doubling its assets in four years "" ICICI's target is to take that up to $5 billion by 2010, placing it on the top of the heap in the private equity capital market.

In comparison, competitors like ChrysCapital handle assets worth $1 billion, Actis has raised $475 million through two funds targeted at India, the Carlyle group has stated it will invest a substantial part of its Asia asset allocation of $1.6 billion in India.

The only fund that has announced an allocation matching that of ICICI is Blackstone, which has set aside $1 billion for investing in India. Ramnath says that over the last two years private equity funds undertook over 100 deals; of these,

ICICI had a 20 per cent share of the market.

How is ICICI doing things differently from competing international private equity funds? One, it is holding equity in companies for a much longer period (3-7 years with an average of 4-5 years ) rather than concentrating only on exit routes. The logic is to provide companies the luxury of time to grow their business.

Two, Ramnath says it is completely focused on India compared to most international funds for whom only a small allocation is reserved for the country. Three, it does not work with companies where it doesn't have a say or where it doesn't own the transaction, and so always looks at picking up at least a 20-30 per cent stake and a role for growing the company (that is why it has not got into telecom, for instance). And of course, it remains more flexible and innovative in deal making, or so Ramnath says.

That is reflected in its transactions. For instance, ICICI undertook the management buyout of Austrian company V A Tech Wabag, a turnkey engineering service company for water and waste water treatment.

Says Rajiv Mittal, managing director of the company, "Unlike international equity funds whose main question was the period of the exit route, ICICI was focused on the company's growth plans. Secondly, in our business, performance guarantees from banks are key to get contracts, and the ICICI banking clout helped."

Ace Refractories, a business that was spun-off from ACC, sees a lot of advantage in the ICICI deal. Says U C Deveshwar, managing director, "Earlier, we were only 10 per cent of ACC's business, so fund availability was limited. Now we are looking at domestic acquisitions as well as a push in the international market. As a result we are targeting a much higher topline growth of 25 per cent." ICICI offered almost 50 per cent more than any of the refractory companies, a key reason why it did the deal.

Similarly, understanding of the Indian needs led Dr Reddy's to partner with ICICI rather than other competing funds. The company had transferred some of the molecules under development to a new company in which ICICI invested in the equity.

Says G V Prasad, CEO in Dr Reddy's Lab, "It was a risk-mitigating strategy for us as we were spending a lot on R&D and that was affecting our bottomlines. International equity funds did not understand our company like ICICI did, and it came up with innovative structuring."

Adds Prakash Iyer, managing director Infomedia India, a publishing company which was bought over by ICICI: "We were earlier only in print publishing, but now we have broadened our focus into publishing BPO as well as e-publishing. ICICI helped us broaden our vision."

The fund also realised that many of its old investors wanted to cash out rather than stay for the entire life of the fund, but were stymied by the fact that there was no exit route. Indian financial institutions (and they constitute 65 per cent of the India Advantage Fund) were looking to book profits.

ICICI found an innovative solution in creating a secondary market for investors. It tied up with Coller Capital, which bought part of the stakes of existing investors in a secondary market operation. ICICI executives say that Indian institutions booked 50 per cent of their profit through this route. The flexibility helped ICICI rope in more investors in the new fund and it hit the $1 billion figure quite easily.

Still, critics suggest that ICICI has been too cautious, that it is only looking at medium-sized companies. Points out a senior executive of a rival equity fund, "ICICI is only looking at small deals. Big returns come from taking on big deals as Warburg did in Bharti; ICICI does not have the appetite for such size."

Ramnath says the reason is simple. The size of its funds and the fact that it wants a significant shareholding and say in a company keeps it away from mega deals. Also, a large part of its initial investors were Indian FIs who were testing the waters for the first time, so that could change. She points out

ICICI is now quite comfortable investing between $75-100 million and roping in partners for acquiring large companies through leveraging debt.

In the realty business too, ICICI faces tough competition with an array of new realty funds in the market. According to Cushman & Wakefield, $2 billion have already been committed by various funds for the next few months. A bevy of international realty funds are seeking government permission.

But Sanjay Verma, deputy managing director of Cushman & Wakefield, cautions: "The Indian realty market lacks scale, the number of deals is small, and there is a problem of clear titled land." The other risk is, what will happen to these funds should the real estate bubble burst? Is ICICI treading on dangerous speculative territory?

ICICI's reponse is a multi-pronged strategy. Ramnath says it is bringing in institutional funding in an area that depended on individual financiers, to create a long-term perspective of the business rather than go from project to project. And the risks are mitigated, she points out, by the fact that end-users are corporates who lease out the property.

The fund has begun by creating a land bank "" it already has 300 acres and hopes to up it to 700 acres in the next two years. Next, it is using a twin strategy for land development "" either through tying up with existing developers who do not have enough cash to buy land, and fund them them through a joint venture. Or to undertake the project on its own steam in a JV with US-based realty developer Tishman with which it is developing the Hyderabad and the proposed Bangalore projects.

The gameplan is to have a mixed portfolio. Currently 65 per cent of its land is in the metros, and the remaining in emerging cities like Pune. The logic is simple: premium locations with a premium building will always fetch a premium, and in case of a downslide they can be liquidated easily.

But to hedge against a downslide in its commercial space, ICICI is focusing on property management or simply taking care of the needs of its clients that have leased the space by ensuring it caters to their requirements of expansion, or parking space, for instance. Once these are taken care of, clients (who are tied with nine-year leases) rarely want to move out.

But that does not imply that ICICI will go in for premium pricing in all its locations. In emerging cities it hopes to play the pricing game to woo customers. In Pune, for instance, the company hopes to create about 2,000 residential homes around either an artificial lake or a golf course, thereby building a new township on an investment of Rs 100 crore.

But the location is still a half-hour's drive from the city. So in order to attract customers it hopes to hawk apartments at around Rs 2,000 per sq ft, a discount of over 20 per cent on Pune prices.

To create more value, ICICI with its JV partner is planning a triple whammy in Hyderabad "" an upmarket shopping plaza and office space, a five-star, 200-room hotel, and at least 40 service apartments. Says a senior ICICI executive, "Hyderabad does not have well-designed residential apartments and good corporate office locations. That is what we will offer."

Its sheer aggression is probably giving realty developers sleepless nights, but with $1.4 billion by way of fresh cash in its kitty ICICI is poised for the next big kill. Watch this space for the announcement.

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What the Others are doing*

Blackstone has said it will earmark $1 billion from its various funds for India

Actis has raised $475 million for investment in South Asia through its India Fund II and South Asia Fund II

ChrysCapital has raised two funds worth $800 million, taking its total tally of funds managed to $1 billion

The Carlyle group expects to invest part of its $1.6 billion Asia asset allocation in India

Henderson Asia Pacific Equity Partners has raised a $400 million pan Asian growth capital fund which will invest in India and Asean countries

Temasek, the Singapore-based government supported equity fund has been involved in big deals, forking out $360 million to buy equity in Tata Teleservices and has made key investments in ICICI, Matrix Labs and Apollo Hospitals

IDFC Pvt Equity has recently raised $430 million for its second fund IDFC Equity Fund II The earlier fund had assets of $190 million

* based on public statements and assessment by industry experts