One of the youngest domestic private equity (PE) players, Aditya Birla Capital Advisors has successfully raised its maiden fund of Rs 675 crore at a time when fund raising is difficult. It will soon announce the second and final closure of this fund. The fund has already made a couple of investments. The most recent being Rs 50-crore investment in Anuapm Industries. Bharat Banka, managing director and chief executive officer of Aditya Birla Capital Advisors, shared his views with Shivani Shinde on the fund, why it is different and how domestic companies are eyeing investment from PE players. Excerpts.
By when do you see the second closing of the fund? What will be the fund size?
The second closing will be achieved by March 2010. The overall size will be over Rs 750 crore. The first closure, which we achieved in January, was around Rs 675 crore. In the second round, we will raise an additional Rs 80-100 crore. However, we are prioritising the timeline rather than a target, unlike the first closure, where we had targeted Rs 500 crore, but could get Rs 675 crore. Besides, we wish to restrict the fund size in line with our investment focus and philosophy, as the genre we plan to invest doesn’t require it.
What does that mean?
If the per deal size crosses Rs 100-120 crore, then you are getting into different kind of companies and, for those firms, you need to have different fund size and investment management philosophy. We are looking at investing Rs 60-80 crore, which is a mid-market segment and here companies need our active investment management. Also, we are clear that we want to play that role.
The number of PE players raising funds from the domestic market is increasing. Is the Indian Investor community warming up to this segment?
The basic construct of the domestic market that it lacks depth continues. You have to spend larger time in raising funds. Institutional pocket is also limited. But on the positive side, the high networth individual (HNI) community is waking up to this opportunity. Investors need to realise that their earlier investments have given them good returns. But yes, in terms of size, the domestic market is not as big as the international market.
How has the sentiment changed from a promoter’s point of view?
The confidence among companies has improved. This is also allowing them to go ahead with their expansion plans and raise money by equity or debt. You will see lots of investment in capacity building. Some companies are also telling us that this is a good time to acquire assets abroad. But, this is not for geographical expansion in western countries. The reasoning is they want to beef up technology. If they can get hold of an international company with a specific technology, then they are ready to look at a joint venture or an acquisition. There is another set of people who are looking to have footprints in such growth regions as Africa. They feel such regions could be next India and China.
Do you think market sentiment has changed over the last year?
Fund raising has become better, but is far from being cozy. Those who will manage to raise funds would be able to do so purely on the basis of their brand. This is true, especially when you are planning to raise from the domestic market, as Indian investors are very brand conscious. Also, Indian institutional investors do not like a ‘cowboy’ approach. To give our own example, we launched the fund in June 2009 and met all our institutional investors with a blueprint on what kind of products they wanted to see. So products also matter. We eventually customised a product for them.
...and what was the feedback?
Clients said that they did not want a huge volatility portion. They were comfortable if 70-80 per cent of the portfolio was within a narrow range of predictable returns and where investee companies have a median return of 20-25 per cent. That meant, immediately, eliminating some risks. For instance, to remove the bankruptcy risk, we decided not to invest in start-ups and early stage. We also removed firms which are cyclical in nature, but we decided to invest in firms that are asset light.
As far as execution was concerned, since we want to be an active manager, we would work closely with the investee firms.
What will be the risk potential in your portfolio firms?
We have avoided all the risk we could right at the drawing board. While it is difficult to point out the exact percentage, if compared to an early-stage fund, we are certainly better placed. If their risk is 90 per cent with higher returns volatility, then ours will be 20-30 per cent.
