Rapid growth, one step at a time

ICICI Venture is a name that has become synonymous with Indian private equity. Renuka Ramnath, the managing director and CEO of the firm, speaks to Siddharth Poddar about its evolution, aspirations and more.

ICICI Venture's roots can be traced back to the origins of the private equity industry in India. Then known as TDICI Limited, ICICI Venture was founded in 1988 as a joint venture between ICICI Bank and the Unit Trust of India, which at the time was the only company providing local investors with the opportunity to access the capital markets. ICICI Bank acquired UTI's stake in the joint venture in 1998, and since then, ICICI Venture has been a fully-owned subsidiary of India's largest private sector bank. Today, ICICI Venture manages assets of about $2.5 billion across private equity, real estate and mezzanine, making it the largest home-grown private equity firm in India. The firm is headed by Renuka Ramnath, the managing director and chief executive officer. Ramnath has been in charge since 2001. An ICICI loyalist, she has been with ICICI since 1986, when she began her career at the merchant banking division of the bank. She then headed the corporate finance and equities businesses of ICICI Securities, an investment banking joint venture between ICICI and JPMorgan. In 1997, she returned to the bank to set up a structured finance business.

Two years later, she was appointed as the managing director of ICICI Eco-Net where she headed the e-commerce initiatives of the bank. She finally assumed her current role in 2001 following the merger of ICICI Eco-Net with ICICI Venture.

Her career is being tracked not just by people in the financial industry but by the wider public also. The increasing profile of private equity within the Indian economy, the Indian media and the fact that ICICI Venture is India's oldest and arguably preeminent home-grown private equity firm contribute to this scrutiny. The fact that Ramnath is a woman in what is a male-dominated industry counts too.

Meeting her you quickly recognise a steely resolve within an open and animated disposition. “She's nobody's fool,” comments an investor who has followed the firm over a number of years, “but one of her key skills is to carry people with her, through a combination of engaged debate and decisiveness.”

As is often the case with people accustomed to being in the limelight, Ramnath does a good line in self-deprecation. When asked how she sees her current role, she plays it down: “In some sense, I'm engaged in the simplest business – please deliver sufficient returns to investors who are putting capital at risk.”

ICICI Venture is one of India's best known private equity firms today, along with the likes of IL&FS Investment Managers, ChrysCapital and IDFC Private Equity. But one area where it perhaps stands out is in terms of its active pursuit of larger-scale buyout investments.

The firm has come a long way since 1998. From raising a fund as small in size as $6.8 million, ICICI Venture today is in the market to raise a $1.5 billion private equity fund. Back then, the firm made only venture capital investments.

With time, however, the focus shifted to larger and more complex transactions. “ICICI has moved away from venture capital, and I singularly take responsibility for that,” says Ramnath. From 2001, the firm started moving out of venture capital investing and began pursuing growth capital investments, and subsequently buyouts as well.

“ICICI has moved away from venture capital, and I singularly take responsibility for that.”

As part of this change in emphasis, the firm completed India's first leveraged buyout in 2003, an $11 million investment in Infomedia, a Yellow Pages and magazine publisher. The firm also lays claim to having made the country's first mezzanine investment in Arch Pharmalabs, a $38 million investment in 2002.

In 2003, the group raised India Advantage Fund (IAF) Series I, a $267 million fund focussed mainly on growth capital investments and a few control stakes across all sectors. That was followed by IAF Series II, an $841 million dollar fund that was closed in 2006. IAF Series II is also a growth capital and buyout fund, but it invests in larger deals in sectors driven by domestic consumer demand, outsourcing demand and infrastructure-driven growth.

The firm then moved a step closer towards its aim of becoming a diversified alternatives manager with the launch of its first real estate fund. In 2006, it closed India Advantage Fund (Real Estate Series 1) on $562million, still one of the largest domestic vehicles raised. The firm is currently setting up a separate team to make infrastructure investments as well.

Recent media reports have suggested ICICIVenture is looking to manage assets of $10 billion by 2012. Ramnath clarifies that at this point of time the firm is only in the market for a $1.5 billion private equity fund. “I am neither driven by ego, nor am I oblivious to what is happening,” she says, referring to the current market conditions. Although there are no immediate plans to raise an infrastructure fund and a second real estate fund, market sources suggest both are in the pipeline.

Jayanta Banerjee, senior director for corporate and strategic initiatives at ICICI Venture, says that managing $10 billion is a “strategic goal” and one that is not defined by any pre-determined timeframe. He says that the firm will have follow-up funds for everything that it currently manages, and that once their infrastructure team is in place, the firm will raise a dedicated infrastructure fund as well. “In terms of timeline, it depends on how the economy pans out – it is a function of the economy,” he says.

IAF Series III, which is now being raised, willmake growth and buyout investments in India and in cross-border transactions that have a linkage to India – either in terms of the companies' resources or in terms of their consumption markets. Key sectors of focus for the fund will be services and manufacturing.

ICICIVenture's fundmanagement company is wholly owned by ICICI Bank and as a result itsmanagers have become accustomed to answering a host of questions relating to the implications of being a captive firm. Several limited partners PEIA spoke to for this article said they had elected not to invest with the group because of concerns they have that are associated with all captive firms: most typically, those pertaining to compensation-sharing and independence of operations.

Ramnath confirms that there is a big difference between owning a firm and being accountable to some other owner. “The firm's aspirations cannot be merely what Renuka Ramnath wants,” she says.

However, she adds, for all practical purposes the firm functions like a non-captive private equity firm. “In terms of investment philosophy, how youmanage the firm, how you hire people and the like, there is no difference,” she says. The bank stays at arm's length in relation to operational matters and has no representation on ICICI Venture's investment committee either.

With regards to compensation, Ramnath says that it, inevitably, has been an area of debate and that there is a constant dialogue between the two parties. She rejects though any suggestion that a buyout of the group – as has happened with many former captive private equity operations – would be a compelling opportunity.

Being a part of the ICICI franchise brings various advantages. The firm can leverage on the brand name of ICICI Bank, and its extensive network of corporate relationships. As India's second-largest bank and largest private sector bank, ICICI has access to the government, regulatory bodies and industrial forums.

What about the departure of various professionals? Over the years, ICICI Venture has lost a number of personnel to other firms, prompting competitors and commentators alike to wonder if staff retention has proved a problem, possibly on account of being a captive. Look around the private equity landscape in India today and it's safe to say that at least one in three Indian private equity firms has a former ICICI Venture person installed. This year for example the firm has lost two senior investment directors to other firms – Bala Deshpande, now with US venture group New Enterprise Associates, and Aluri Srinivasa Rao, who Joined Morgan Stanley's private equity operation In Mumbai.

“True growth will come when you open up everything: allow everyone to handle things themselves.”

Sources say that while some professionals have left the firm due to compensation issues, others may have been dissatisfied with the way the firm is managed in terms of progression of their career paths. In the context of India's flourishing private capital industry, it is unsurprising that ambitions have run high.

“As the market leader, we have always been the natural poaching ground,” says Ramnath. She adds that some degree of mobility is good for the industry and for the firm. “In return, it brings with it fresh blood, fresh faces and fresh ideas,” she says. It also allows people remaining at ICICI Venture to grow with the company.

When asked how the firm is coping with personnel movements Ramnath replies that she is “not even a wee bit concerned” about it affecting the future plans of ICICI Venture. Though she stops short of developing the point, one gets the impression that a loss of some professionals does not make too much difference to a firm that currently employs a total of more than 120 people, of which about 55 are investment professionals. Its private equity team has some 25 investment professionals, with the remainder split among real estate, mezzanine and infrastructure.

Earlier this year, ICICI Venture appointed Rajeev Bakshi as a joint managing director. Bakshi's appointment came as a surprise to many as he was not of the industry and hence had no immediate private equity experience. What he does bring, however, is almost 30 years of corporate and senior management experience. Bakshi was most recently the senior vice president-commercial for Asia Pacific at Pepsi Co, based in Hong Kong. Prior to joining Pepsi, he worked for nine years at Cadbury, where he was the managing director of the firm's India operations and also the managing director of its South African operations.

When asked about her decision to have a joint managing director, Ramnath says: “I felt that I needed to expand the leadership bandwidth at ICICI Venture. Rajeev has been in industry for 30 years. He's seen a lot in this time,” she says.

But to have someone with no private equity experience come in as a joint managing director of India's largest firm? “Is it a bold bet?” volunteers Ramnath. “Of course it is.”

Clearly the selection of Bakshi was led by Ramnath, and the response of others to her choice has made it easy for her to explain the rationale. “Why did I do it? Because Rajeev has nothing to prove to anyone. He has holistic industry experience. It's time for him to give back all that he's learnt and experienced. What private equity experience does he have? What experience did I have nine years back?” Fair point.

At ICICI Venture, Bakshi works with the investment teams to shape investment strategies. He also leads the firm's real estate practice.

Any discussion held in October 2008 must inevitably include the subject of current market turmoil. While the Indian stock market has plummeted by about 50 percent since hitting its all-time high in January this year, India has so far been relatively unscathed by the effects of the global financial crisis. For this Ramnath credits the country's regulatory regime. “Thus far, the tightness in regulations pertaining to capital controls has worked very well,” she says. But she hastens to add that it is now time for regulators to open up.

Rarely short of a strong opinion, Ramnath adds: “True growth will come when you open up everything: allow everyone to handle things themselves.”

Liberalising markets has fast become a contrarian view for many and Ramnath is conscious that regulators have significant extra responsibility at present. But that should not translate into heavy-handed actions. “It is like the regulators are in control of a valve through which money flows. My fear is that they'll tighten the valve further, my hope is they won't.”

For now, though, she believes current market conditions are likely to affect ICICI Venture; like any other private equity firm looking to access new capital from investors the process is going to take longer and be more complex. Many LPs' allocation models have been severely distorted on account of collapsing public equity valuations. That said, India-facing GP groups remain of considerable interest to institutional investors. One consistent message from a number of prominent investors in the asset class is that their allocation to Indian managers will quadruple, she says.

Looking at the firm's existing portfolio of investments, she remains confident about their ability to weather the storm because of the “robustness of the capital structure that we have in our underlying companies”. Ramnath points out that only about 15 percent of India's GDP comes from exports, implying that even with a slowdown of the world economy, domestic economic activity will continue to provide the impetus for growth.

She is optimistic, “not because it suits me”, but primarily because she expects the turmoil in the markets to throw up a number of opportunities. For example, she says, unlisted companies will find it difficult to go public with the markets as they are today, providing private equity firms with investment opportunities. Secondly, no entrepreneur thinks about his or her business as a domestic business. India has been an insulated economy until recently she says. In the last five years though, as India has opened up, many entrepreneurs are aspiring to take their businesses global.

With these factors in mind, the firm is currently looking at deploying capital confirms Ramnath.

But does India present enough opportunities for buyouts? It is a question that she's keen to address. ICICI Venture, she says, has a broader definition of buyouts, comprising four kinds: the first are the classic buyouts, where direct controlling stakes are acquired. Then there are the tried-and-tested roll-ups. The third type are club deals where controlling stakes are acquired with a syndicate of other investors. And finally, the fourth kind is when the firm works with portfolio companies to acquire other companies.

Ramnath says that buyouts are possible in India, but they often have to be structured differently. “You have to be a hugely adaptive organisation to be successful in India,” she says.“Any other economy's models cannot be applied here.”

“If I'm proud of something, it is that I have proved that in India it is possible for successful companies to have faceless owners.”

Ramnath's one concern is the shortage of seasoned private equity expertise in the country. “There is very little private equity talent in the country today. Even of the talent that we have, I would say that close to 80 percent have not seen cycles or downturns. A number of private equity professionals have mainly been investing proprietary capital, which is completely different from investing out of a third-party fund. We have seen a lot of people migrate from consulting, investment banking or industry-related backgrounds to private equity, and that's not an easy transition to make for most,” she says.

In her opinion, the lack of quality private equity talent will be a cause for concern in India over the next three to five years.

But otherwise, she is optimistic about the continuing growth of the private equity industry in the country. She says that while there may be a slowdown due to higher inflation and other macro-factors, over the long-term, private equity will play an instrumental role in growing and reshaping India. And the current crisis will throw up a number of distinctive opportunities for firms like ICICI Venture.

She hopes that the regulators develop an open framework – with the primary change she'd like to see being the development of a practical set of guidelines for delisting a company. As any casual observer of the Indian stock market will quickly note, there are a plethora of companies listed (the NSE has over 1,000) and many languish without liquidity or the ability to raise further capital. The argument for the positive input of private equity in these cases is compelling and it is therefore vital that regulators re-cognise that companies can be made more robust with private capital.

This concept speaks to more than the transformation of a balance sheet: in a country where successful corporations are very often still owned and driven by founding families, the contribution of private equity can seem unusual, even strange. Says Ramnath: “If I'm proud of something, it is that I have proved that in India it is possible for successful companies to have faceless owners.”

Where does the firm go from here?

Ramnath's answer is emphatic, practiced: “Our aspiration is to be the best alternative asset manager in the multiple asset classes of private equity, real estate, infrastructure and mezzanine.” It's clearly more than the well-rehearsed speech of the fundraiser.

One reason she says this is because all these asset classes share certain common features: “They are all characterised by long-term investments, and they are focussed on the long-term needs of corporate India” and “we are focused on the opportunities that lie in the fundamental growth story of India.”

The firm also has ambitions outside its home territory. Ramnath clearly can see ICICI Venture becoming a regional and some day a global player in private equity.

The firm has already started venturing into the European market though joint investments with Indian corporates and via acquisitions made by its portfolio companies.

The firm is aspiring to grow rapidly – perhaps too rapidly, say some critics. Ramnath has no illusions about the enormity of the task. “This has to be done brick-by-brick, one step at a time. How slowly or how fast this will happen is not something that I can tell you now, especially in the current environment.” She pauses then affirms: “These are the long term aspirations we have.” Few would doubt that Ramnath expects to be leading her team as they work to deliver on them.