Smartest buyback

Here. ICICI Venture biting another bitter pill. It invested $22.5 million for a 43% stake in Dr.Reddy’s Labs (DRL) research outfit Perlecan Pharma in November 2005 and is getting back $9 million for divesting it back to DRL. Joining it in drinking that Karma Kool-Aid is Citi Venture that is in a brual *sell-all* mode giving in to CEO Vikram Pandit's earnest efforts aimed at resuscitating Citigroup by selling all things that it can find a buyer for.

I think of Dr.Anji Reddy. He must be allowing himself a rare chuckle (*rare* because the $754 million Betapharm acquisition is bleeding now). He had invested $7.5 million in Perlecan for a 14% stake. Now he has 100% stake for just $25.5 m – ain't that smart?

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When it's other people's money....monkey around

My logic hasn’t been out of place entirely. I had this belief that if I have to make it big as a fund manager or in Private Equity, I need to be a good judge of an early investment opportunity. I was too dumb not to take the easier B-school route to PE superstardom. Instead I began using my sparse savings and tried out my luck investing in the stock market to prove myself in an old fashioned way, back in 1995. If I can win with my money, I could do it with others' as well. I needed that validation.

Till date, my least lucrative exit over a one year horizon has been at an ROI of 165%. Now as I told you I started with my sparse savings and I was totally aware of the need to stay liquid to buy into the next opportunity; hence my horizon was restricted to just one year (so that my returns come tax free).

Then come the PE champion investors. I marveled at the ability of these guys that raise huge funds and thought they must be wunderkinder notching up stunning returns. I looked up their profile and thought the degrees from Harvard and Wharton must have magic in them. Everyone had an Ivy League record and some excellent career profile. No wonder they are where they are – right at the top of PE fund houses. Moreover since PE being alternative investment thro negotiated deals, they have access to classified information (`insider information' if I have that) besides some special rights granted by covenants built into term sheets (such as veto, tag along, pay for play, ratchets etc. etc.)

So I thought the game’s up for average folks like me. How do I stack up if the game starts with such a mighty disadvantage? I began to watch their investments in Indian companies (that I relate better) and often wondered why they take exposures in companies at such high valuations. “Silly, they’re from Harvard and Wharton; they are not dumbasses”. “May be, they see value that you don’t - they have access to classified information, you know?” I taunted myself.

But today I read this. The portfolio companies where PE funds invested are all trading at steep discounts to their acquisition price and now the same PE funds are on a Rupee cost averaging spree by mopping up shares from the secondary market to even out the gap. Apax partners bought 11.41% in Appollo Hospitals at Rs.605/- a share. Now they are buying from the market at Rs.505-550 a share hiking their stake to 14.52%. Several others including Standard Chartered PE (in M&M Financial services), Blackstone in Gokaldas partners, Promethean in Nitco Tiles/EIH, New Vernon in Shriram EPC are also hurriedly playing catch up.

Now wait a minute! That’s how I too build my portfolio. How different are these guys? Why are they perched in a higher league? I managed minimum 165% returns over just one year but these guys wait for over 6-7 years to get a CAGR of 25% or even less. I don’t have a Wharton degree alright, but I beat these guys in their own game by many a wide mile. Isn’t that endorsement enough for my stock picking skills? I don’t follow analysts. I just look at managements, their track record, state of health of the business and a few key ratios like ROE, RONW, Debt:Equity and P/BV besides an occasional peep at price/volume charts. By keeping things simple yet systematic, the stocks that I pick end up as sure winners.

Perhaps the awareness that I could go wrong keeps me on the edge. A bit fearful at times that always makes me keep looking over the shoulders even after I invest. The feeling that I am up against informed investors that wield mighty clout never allows me to be smug. Over and above, it’s my own money and I need to be liquid always. These factors have put together a strong foundation for my portfolio architecture. The PE managers can afford to cover their conscience and be reckless. After all, it’s not their money at stake. They do get their management fee whether they win or lose. More than an occasional freebie from stock brokers that manage their portfolio as well. Why should they care? It’s their investors that pay a price.

Now I know why I could be a misfit in a PE environment. No regrets.

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UTI Ventures' dilemma

"Oooops... I got out! Ok. Let me re-enter..." seems to be the credo surrounding the euphoria around UTI Ventures exit from Excelsoft with 50x returns.

The report says

“Excelsoft posted a net profit of Rs 25 crore on a topline of Rs 50 crore. Sources further indicated that UTI Ventures, in addition to selling its stake to D E Shaw, has invested a further $5 million in this firm at its present valuations.”

Now that’s mysterious if not surprising. Funds exit a venture if their investments fetch valuation far in excess of their internal estimates. In that case, UTI ventures should have just sold its stake and not buy more into the same venture. But here it has done precisely that. What could be the reason?

I think UTI ventures, with the global liquidity crunch and Indian IT vendors giving out cautious guidance, could be a bit unsure of how the company’s fortunes will fluctuate going forward. US Dollar has also been declining much to the dismay of many s/w exporters. So why not lock down the premium that is on offer and still to hold a foot in the door, let’s keep some stake in. The company is operating under 50% gross margins as well.

UTI Ventures’ sell-off pips other big exits in the private equity space like ChrysCapital and Citigroup Venture Capital making 26-30 times their investment in Suzlon Energy, and Baring India selling its 34.73% stake in MphasiS BFL to EDS at about 25 times its initial investment for Rs 1,150 crore. Gaja Capital had monetized its investment in learning major Educomp Solutions by 22.5 times, while ICICI Ventures’ exit from Infoedge (Naukri.com) fetched it 17.5 times higher earnings.

Major players in the education space in India include Educomp Solutions, Everonn Systems and Core Projects & Technologies. The Aditya Birla Group recently picked up about a 5% stake in Core Projects & Technologies for Rs 13.5 crore. Last year, Gaja Capital Partners invested $8.25 million in education support firm Career Launcher. Mauritius-based India-focused fund Helix investments put $12 million in tutorial firm Mahesh Tutorials Educare while SAIF Partners invested $10 million in English training academy Veta.

I look at trailing 12 months P/E of some of its peers listed in Indian exchanges. Educomp solutions (99x), Everonn systems (111x) indicates a strong growth potential for Excelsoft. Why UTI Ventures had been in such a tear? Have some of their limited partners been breathing down Raja Kumar's neck? Quite likely. We haven’t heard any major exit by UTI Venture for a long time now.

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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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