Domestic PE firm ICICI Venture sees bigger gains from smaller deals

Instead of competing with global majors, the domestic PE firm is positioning itself as a 'bottom-up' player offering local expertise

You won’t find its name in the pecking order of the top 10 private equity (PE) firms in terms of total deal value closed in 2020. And though it has struck deals worth $2.17 billion in the past three-and-a-half years, that is only 70 per cent of the total deals signed up by KKR ($3 billion) in calendar 2020 alone.
 
These differentials, however, do not worry ICICI Venture, the country’s first domestic PE firm that was set up in 1988 when India was nowhere on global PE players’ radar. But over the past three decades, PE and sovereign wealth fund investments in India have grown dramatically and changed the dynamics for domestic PE players. So ICICI Venture’s strategy has also changed: It does not plan to compete with global majors for mega deals.
 
“We will position ourselves differently, to support bottom-up players, industries or sectors that need an understanding of the local market, local consumer, local laws and help them to become bigger, maybe even get global scale,” said Puneet Nanda, managing director and CEO.
 
These companies face a dearth of capital because the bigger global investors only look at them when they have achieved scale, Nanda explained. That these companies operate in a different space altogether is reflected in the fact that ICICI Venture’s deal size for its PE vertical ranges from $25-30 million to $50-60 million. The average deal size of India’s top 10 PE players in 2020 based on India Private Equity Report is over seven times larger at $465 million.

 
ICICI Venture won’t abstain from mega deals, but will do so via joint ventures. In infrastructure, for instance, it has pooled in resources by setting up a $850-million fund (which can raise $1.5 billion as debt) with the Tata group for investment in power, and just last year closed a $1-billion deal to buy out Prayagraj Power, a Tata subsidiary.
 
At the same time, the PE company has decided to re-enter, after a gap of 20 years, the business of funding digital start-ups (it was started with the intention of supporting early-stage companies but then moved to offering growth capital for larger companies from 2002). The plan is to float a separate vertical and fund to invest in early-stage companies, where it expects a higher return on investment (RoI) than from mature companies. Again, it’s an arena that global PE players enter when these start-ups develop scale (Paytm or Byju’s, for instance).
 
Critics said ICICI Venture missed the bus in the last decade by not putting in money in start-ups. There are now over 64 unicorns, many with multibillion dollar valuations and looking to go for IPOs, providing their investors multiple returns on their investment.
 
Nanda counters that the start-up revolution is still kicking off and reels off some figures to prove his point. Digital- and tech-oriented deals are only around 25 per cent of all PE deals currently and could hit 40-50 per cent. Fintech and e-commerce deals are around 40 per cent of all deals, so there is a large chunk of business taking place outside this space.
 
The focus on digital start-ups will be in consumer-facing businesses, where Nanda said ICICI Venture has expertise, instead of pure B2B. So that would include financial services, healthcare, ed-tech and e-commerce, to name a few.
 
In real estate, it has been focusing on affordable housing with deal sizes of $10-20 million. Nanda said this strategy has helped the company avoid the vagaries of demand and steep fall in prices during the pandemic that left others straddled with unsold assets.
 
It is setting up a $300-400 million fund to support companies building the kind of commercial properties that will be in demand post-pandemic — smaller and mid-size office buildings, many of them in residential areas near where employees live, for instance. For perspective, consider a single deal that Brookfield did with RMZ group last year at $2 billion.
 
ICICI Venture is also looking at setting up a separate “special-situations fund” for stressed assets. “Credit requires greater local expertise. So, being part of the ICICI group and having known the Indian corporate sector for ages, we feel we are well positioned,” said Nanda. He may be right, given that global funds’ record in picking up assets under the Insolvency and Bankruptcy Code (IBC) has been negligible.
 
ICICI Venture earlier had a joint venture, AION Capital, with New York-based alternative investment firm Apollo Global Management, which jointly made some key acquisitions such as Monnet Ispat through the IBC. But last year, the two decided to go their separate ways for future funds in this space.
 
All of this means ICICI Venture will need more money. With over $62 billion invested in various deals last year in India, despite the pandemic, money does not seem to be a constraint for ICICI Venture’s expansion plans. Nanda pointed out that the company has over $5 billion of assets under management and hopes that will double in a few years. Analysts reckon it also has over $1.5 billion of dry powder that it can utilise for deals anytime.
 
But the fact is that domestic PE players will have to aggressively tap local sources of money. Multiples, set up by former ICICI banker Renuka Ramnath, for instance, has upped the ante — 25 per cent of its third fund is from domestic institutions and high net worth individuals compared to 10 per cent in the second fund.
 
But, with banks’ and insurance companies’ appetite for risk constrained by regulatory strictures, Nanda is betting on liberalised rules for global pension funds, which are a big source of money for global PEs, to invest in domestic PEs.
 
“The good thing is that both pools of capital are increasing, and there is more regulatory enablement for international funds,” he said, adding, “And we are hungry for more capital.”