PE managers: All geared up and nowhere to go

Cash-rich general partners have adopted a wait-and-watch policy

Since 2009, a clutch of high-profile fund managers like Renuka Ramnath, Ajay Relan, Subbu Subramaniam and Sumir Chadha quit their jobs to float their own private equity (PE) funds. Now, after facing tough times raising money, many of them are finding it tougher to deploy capital.

Though industry veterans like Renuka Ramnath, chief executive of Multiples Alternate Asset Management and former chief executive of ICICI Venture, claim they are happy with the pace of investments, experts believe cash-rich general partners, or GPs, are unable to find the right deals and have now adopted a wait-and-watch mode.

Sanjiv Krishan, leader (PE), PricewaterhouseCoopers, said, “There is no doubting the fact that PE investors are being extremely cautious in their investment choices, owing to the slowdown in the economy, the self-imposed tax and regulatory uncertainties, unpleasant corporate governance record experiences and most importantly, more than half their investments, particularly between late 2006 and 2008, are underwater.”

In November 2011, Ramnath raised her maiden fund of $450 million from various investors, including Canada Pension Plan Investment Board. In April 2010, she announced the first closure of the fund at $250 million. However, even after 26 months of the closure, she could close just three deals — those of drilling equipment maker Sara Sae, Cholamandalam Investment & Finance and Indian Energy Exchange.

All new GPs believe they are under no pressure, as they have capital commitments and three to four years at hand to deploy the capital.

Ramnath said, “Our investors are very pleased that the investments have been carried out in a measured way and under no pressure. The investment period for our fund is till 2015. Our investors expect us to invest over this period to mitigate the risk of market volatility across this horizon.”

Other cash-rich firms include Westbridge Capital and MCap Fund Advisors. MCap, floated by ex-Baring India partner Subbu Subramaniam, raised $60 million and made three investments — in Jyothi Labs, City Union Bank and Regen Powertech.

Subramaniam, managing partner of MCap Fund Advisors, says apart from valuation mismatches, the depreciation in the rupee also hampered deals. “I did three of my deals when the rupee was stood at about Rs 50/dollar. As the rupee depreciated to Rs 56/dollar and is likely to fall further, I’m not in a hurry to deploy the capital,” he said.

In the past few years, the rupee’s depreciation has reduced the value of portfolio companies by 20-25 per cent. Most of the investments, now ripe for exits, were carried out when the rupee stood at Rs 40-45/dollar.

Due to a mismatch in valuation, talks between Multiples and Barbeque Nation, a subsidiary of the Bombay Stock Exchange-listed Sayaji Hotels, held last year, did not materialise. Early last year, Sumir Chadha had quit Sequoia Capital and reformed Westbridge Capital, with a focus on private investments in public equity transactions.

However, so far, the PE firm concluded only a single deal, in July Systems, despite raising its maiden fund of $500 million. When contacted, Chadha refused to comment on the fund’s strategy.

Ajay Relan, who started CX Partners after leaving Citibank’s PE fund Citi Venture Capital, however, is an exception. In 2010, CX Partners had raised $515 million. So far, Relan has deployed about half his fund through four deals — in Monnet Ispat, NTL Electronics India, diagnostics chain Thyrocare Technologies and Bangalore-based medical textile manufacturer Sutures India.

Ramnath said, “Under the current market conditions, LPs do watch the choices their GPs make. This puts an extra degree of caution for GPs in selecting the right promoters and the right business models that can sustain such market conditions over the long haul.”