"ICICI Venture is lying"

Just finished reading this BS report – “PE firms to rethink India strategy”. I say, “they had better” !

The report quotes Vikram Uttam Singh, Head, PE advisory group of KPMG “The Subhiksha incident will make PE firms more cautious on how much of a free hand they allow to a promoter. Some PE funds are concerned that promoters have a wide range of authority in their companies and could look to establish structures that limit some of this authority”.

Here are my observations.

KPMG may have compulsions to take sides with PE firms as their survival depends on such clients. But why does it credit PE firms with so much of naiveté? ICICI Venture had an exposure of 33% in Subhiksha of which it off-loaded 10% to Azim Premji’s PE arm (Zash Investments) for Rs.230 crore – apparently without discussing with Subhiksha itself that was badly in need of cash.

If the same money (Rs.230 crore) was introduced directly into Subhiksha, (instead of buying out ICICI Ventures stake), the company could have been saved to an extent. But I-Ventures wanted to lighten its holding and thought otherwise.

While it’s ok for PE firms to cash out, they need not profess their ability to have long term relationship with their portfolio companies and the “strategic managerial edge” their presence in the Board offers to such companies. When that is the case, what was Ms.Renuka Ramnath (one of I-Ventures nominees on Subhiksha Board and CEO of I-Ventures) doing when she approved the proposal for massive scale up by Subhiksha? Now is she telling us she was not aware of it, even as I-Ventures had the rights to appoint majority of Subhiksha Board? Or does it mean she was too busy to attend Subhiksha Board meeting where such a critical decision was made? Or is she admitting I-Ventures had no monitoring mechanism over its portfolio companies? That’s a bit too much. If I were a LP investor in I-Ventures, I would have taken it to task and would proceed against them for dereliction of duty. A bit too naïve. She certainly can do with some education on sophisticated lying.

Just as in the case of Subhiksha, the first thing PE firms do when they sense trouble is (a) to quietly off-load their stake to an unsuspecting investor and (b) withdraw its nominees from the Board so that they need not defend lawsuits filed against them by unpaid creditors/ bankers / statutory authorities like EPFO in this case.

In simple terms, PE firms are pure fair-weather friends. All talk of strategic advisory services and expertise all are pure bunkum. They have none and they are here just to skim the profits. At the slightest sense of trouble, they chicken out – like the proverbial rats from the sinking ship.

Nothing wrong absolutely. Buy why not say it upfront? Why the façade of management expertise when you know you have none? Why not tell the portfolio investors - “Take the money and pay us back 10 x returns. In case if you goof up, you’re on your own” !

And lastly about KPMG and its ilk of PE advisory groups. How come all those transactions advised by these so-called whizkids yield a negative return soon after the transaction? Are they whizkids or half-baked, mother fucking scumbags that shamelessly face the media and talk ill of the companies they ran a due diligence on and arrived at a "fair market value"? If after all their “expert” due diligence, their projections go haywire, should they not re-examine their processes and find out what’s going wrong? How long should the investing community put up with such sobs that are ready to even chomp client carrots if there is the word "fee" at the other end?

Why would they? They have mastered the art of orifice-licking and carrot-chomping. That should keep them in good stead besides the standard disclaimers that insulate them :-)
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ICICI Venture is clueless (just as every other PE fund is)

ICICI Venture is planning to list its $1.5 billion real estate fund on the London Stock Exchange (LSE) – News.

PE funds are running helter-skelter. Having espoused a business model in which they raise large funds out of bulge bracket investors to invest in profitable avenues that [are supposed to] yield returns far in excess of market rates, the current uncertainty prevailing in global markets are driving this tribe mad. Nobody knows when oil prices will decline or the threat of inflation recede. Still they have to be in business to recoup their earlier reckless investments that are quoting at 60% below their cost of acquisition; so what do they do?

They come up with ideas like this one – go list your fund. PE funds list their funds usually when they feel unsure of returns in the foreseeable future. But they won’t admit as much. They will tell you “we want to expand our investor base to include non-institutional investors (hedge funds, HNI) that would like to cash out early”. But that’s pure crap. Remember Blackstone listing? Its stock price never got back to its initial listing price of $31. The only investor that got rich was its founder Steven Schwarzman (of the $400 crab fame) who cashed out. If it's a close-ended fund, investors have to wait till its maturity. However, if the listing option is built into the document, then the PE fund can exercise it at any future date.

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In other words, it means [to their investors] “Look guys, we’re clueless whether or when we will make money from our investments at all. But still we want to be in business so that we can earn our management fee [if not carried bonus]. So we will come to you for funds and continue our jig. For the pesky amongst you, we will list these funds so that there is always a two way quote available to you scumbags. Don’t pester us for returns. Just invest and forget, bokay?”

Do you read it differently? Tell me, if so.

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ACE Refractories gets flipped

ACE is flipped.

I had written earlier that ICICI Venture is on a lookout for a buyer for ACE Refractories that it bought out from ACC for Rs.257 crore. A first for an Indian PE firm to buyout a manufacturing company then, for flipping it later.

ICICI Venture seems to have done it in style. ACE Refractories have been sold to Imerys of France for Rs.550 crore, yielding 100% return over two years.

Good going, Renuka…

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They've got balls, yeah !

I was a bit ahead of time then. I am referring to a few US based entrepreneurs interested in raising VC funding for their businesses who had approached me earlier. The businesses were robust, had global delivery models, could’ve been easily replicated in cost advantaged locations – yet Indian VCs weren’t interested. Remember, it happened at a time when most Indian VCs were crying hoarse about lack of investible ideas available locally.

Imagine my relief when I found ICICI Venture has bought out the venture investors from the Seattle, Washington, based Radiant Research for an undisclosed sum.

ICICI Venture has bought out the stake of the original venture capital backers of Radiant who had stayed invested in the company for about 10 years. “Our original venture capital investor group had been involved with Radiant since our inception in 1998. This change in ownership represents a natural transition from a start-up company to an established company with the financial resources to strategically advance all of our late phase service offerings,” said Pamela Spaniac, CEO of Radiant Research. “We are particularly excited about the potential for international expansion opportunities that ICICI Venture will provide.”

Now at least I know one Indian VC that has balls – to look beyond boders.

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Happy flippin' ...Renuka !

Ever tried turning an ocean liner like you do a speed boat ?

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Nah… When you want to turn a speedboat, you turn the wheel. For an ocean liner, you have to plan two days ahead. RMS Titanic couldn’t swerve the iceberg because of it. The only tribe that seems to have managed it so well is Private Equity managers. The ocean liner metaphor here is to a Public company and the speed boat is what it becomes in the hands of private equity. I am referring to the art of buying out companies, sprucing them up and staging lucrative exits. It calls for a lot of guts.

I really wish the trend to pick up in India. Like many firsts to its credit, ICICI Venture can deservedly bag this too – why not…when it’s slogan is “fueling your aspirations”. If she can pull it off, Renuka Ramnath, CEO will surely be tap dancing her way to office soon after laughing her way to the bank.

As per this report, ICICI Venture, the country's largest venture capital firm, is likely to make a return of four times on its cost of acquisition. It had acquired the refractories business from ACC for about Rs 250 crore in 2005. Of that roughly 40% (Rs 100 crore) was equity and the balance was debt. ICICI Venture expects the prospective buyer to shell out Rs 550 crore. Taking out the debt portion of Rs 150 crore, the return on its investment will be Rs 400 crore, equalling four times returns.

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UBS Securities is believed to be advisor to ICICI Venture for the sale of ACE. If ICICI Venture is successful in selling ACE, it would be its first exit from a company, in which it has made a complete buyout. Other companies where it has gone in for a buyout include Infomedia India (formerly, Tata Infomedia) and VA-Tech India (engineering services firm).

The ease with which you flip, is a function of timing and discretion. The next opportunity that’s lying in wait often prods it and the cycle rides on. Too bad these guys not being at the wheel of the Titanic on that fateful night…!

Happy flippin’….Renuka !
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Time for ICICI Venture to mull an IPO…?

I keep reading about the phenomenal success of Fortress IPO and related reports and had also chronicled it in one of my earlier blog posts. Going by this Fortune article, it seems the world’s still awestruck and clearly has not had enough. It as well reminds Blackstone is next in line to hit the road.

Excerpts -

“On the night before Fortress Investment Group became the first hedge fund to trade on the New York Stock Exchange, Wesley Edens and the other four principals celebrated in a manner that befits the firm's intentionally low-key profile. They gathered at a bar on the Upper West Side of Manhattan.

By the next day's closing bell, though, Edens could afford more than just beer and pretzels: His shares from the IPO were worth approximately $2.3 billion. Six weeks later, on March 22, Blackstone Group followed suit when the private-equity shop revealed plans to raise $4 billion in an upcoming IPO.

Since that news broke, Wall Street has been buzzing about who will be the next firm to announce plans for an IPO and invite the public into a world once reserved for high-net-worth individuals and institutional investors.”

I took time off to think what if our local Private Equity firms decided to go public ? Would they fetch similar buoyant response ? The existing listed PE firms like IDFC an Infrastructure focused financial powerhouse ( P/E 18.6, Market Cap $ 2.13 billion) and ILFS Investment Managers a pureplay PE firm (P/E 24, Market Cap $ 76 Million) have been doing well for themselves in comparison with the broader market. But the big fish of them all is ICICI Venture, which is the Private Equity / buyout arm of largest new generation Bank ICICI Bank, with funds under management in excess of $ 2 billion. It would be interesting to watch if ICICI Venture decides to go public and the likely valuation that it might secure – given the dynamism demonstrated by its CEO Mrs.Renuka Ramnath, it is not totally out of whack to speculate.

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And if it chooses to hit the road, here’s what Mrs.Ramnath and her team can aspire for - more or less.

Being comfortable in the limelight may be what finally determines who does and doesn't go public. Given that affairs of ICICI Venture are pretty much transparent, and its very much in the limelight already for Mrs.Ramnath’s stellar fundraising capabilities, if at all there’s anything to hold back, it could only be its investors privacy concerns than one of its likely valuation.

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I'd like a slice of the action....What do you think ?

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Leveraging NIFTY 50...

Just finished blogging a management buyout op, I am dreaming up something else. When you keep getting wild ideas, why wake up ?

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Often when PE activity is very high in any market, the first signal that emerges is that the stocks are underpriced and valuations are attractive. Scratch beneath the surface we stumble upon factors like low cost of funds, low gearing of companies, higher scope for dividends, better yields etc.

Currently if you look at the downturn in Indian equity market, a confluence of all these factors can be seen across the spectrum.

Let me start out by saying that I don't think that stocks are necessarily overpriced at this level, but I don't think the private equity deals necessarily signal massive underpricing anymore. Compared to the past, there is much more money out there in the hands of these investors, and it's all money that they have to get invested or they don't get paid.

Even with stocks fairly valued, with high yield and leveraged loan markets pricing risk so low in recent years, PE firms can still pay a fair price and make killer returns. The point is really seeing if the returns are that great on a risk adjusted basis. Leon Cooperman , previously strategist of Omega Advisors Hedge Fund did his own study back in the 80s which showed if you levered the S&P500 to the same capital structure of typical LBOs, it would beat average PE fund returns. I also believe Prof Kaplan at U Chicago has done some research questioning how strong PE returns really are.

PE funds just take the "market" aspect out of the companies they buy, add some leverage and wait for the returns to be generated. I think the biggest reason it's so easy for PE funds to take these cos private is because investors are so myopic and will take a 20% premium rather than allow management/company to continue doing what they are doing and ultimately wait for the market to assess a higher valuation.

Back a decade or so, with a couple hundred million dollars, they could sit back and wait for a fat pitch that they could knock out of the park. Now, with billions to invest and many more competitors out there bidding up all the really nice deals, it's tough to wait for the same types of situations. So what I think a lot of the larger firms will end up doing is taking private firms with a target return lower than in the past. They will likely end up looking a lot more like mutual funds that can take much more concentrated positions, and benefit from being the controlling shareholder. Also similar to mutual funds, in order to put their money to work they'll have to be more consistent buyers through various market conditions.

Don't get me wrong, returns aren't going to look like public market returns, they'll still bring in returns that pass that, but by less than in the past. It just can't be expected that with all of the money out there and the increased competition that the buyers can be as discriminating as they once were on the deals they choose or the price they pay.

So as these big buyout deals continue, I'm keeping in mind that “take-privates” might not be as solid a market signal as they once were. May be, a few months down the line, we can think of lowly geared companies in the NIFTY 50 to lever up a bit and be eligible candidates in the take-private orbit. Will they ?

Presently in India as the market unwinds, a few smart PE funds are even exiting quietly. ICICI Venture Capital has sold a 3.25% stake in Deccan Aviation for about Rs.32 crore to UBS securities Asia, thro an open market deal for around Rs.94 a share, bringing down its stake in low cost carrier to about 10-11%. As early as 2005, ICICI Venture had acquired around 19% in a pre-IPO deal, valued at Rs.65-70 per share. The Deccan aviation scrip closed at Rs.88 on Tuesday, while the 52 week high was Rs.162. It appears the sale has translated into a 40-45% RoI over a two year period for ICICI Ventures. Considering the volatility in the market and accentuated bad times for aviation sector as a whole, by not waiting for the tide to turn in its favor to higher levels, ICICI Ventures did make a smart move indeed.

Watch this space, just watch ( no noise, or else I'll wake up) for more fun.