November 2009
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PE funds from corporate families on the rise

Most of these families are looking at private equity funds as a way to earn fee-based income.

When Infosys’ Chief Mentor N R Narayana Murthy announced his plans to float a venture fund, he joined a number of rich individuals and families who had traversed the same path earlier.

Murthy’s earlier colleague at Infosys, N S Raghavan, Wipro Chairman Azim Premji, Anil Ambani, the TVS Family, the Future Group, the Tatas and the Birlas, and a few others have either raised or are raising venture capital and private equity (PE) funds to the tune of close to $5 billion.

This aspect, of high net worth individuals and families starting their own PE funds, is a trend catching up fast in India. Though, much later than the famous American families like the Disneys and Rockefellers, who have a history of managing their multi-billion dollar wealth through PE funds or by institutionalising Family Offices.

Industry watchers say many Indian corporate families have been Limited Partners with various PE funds during the past decade. And, in the recent past, have built up teams to fuel their PE dreams. “Most of these families are looking at PE funds as a route for fee-based income. The families seed the fund and go on to raise funds from various institutions,” said a PE analyst.

A host of financial institutions are more than eager to be part of these family PE funds, as they have legacy relationships and huge exposures to the corporate business. Forking out another Rs 50-100 crore to be part of a fund will only further the relationship and it will not necessarily be a burden on the balance sheets of large FIs.

“For example, the TVS family was an investor in venture capital and private equity funds floated by leading financial institutions and banks in India. Now they have started a $250 million fund to leverage on their brand identity,” noted Arun Natarajan, CEO, Venture Intelligence, a research service focused on venture capital and mergers and acquisitions,

While many families look at external investors to build muscle to the fund, Azim Premji, the billionaire chairman of Wipro, has built up a corpus of $1 billion without any external investors. Though the sector-agnostic Premji Invest fund has an active mandate for private equity, it has been more aggressive in the public markets, and industry estimates that close to $350 million has been channelled in through this route. The fund has been selective in the PE space and has picked up stakes in five companies for a little over $200 million during the past couple of years.

“It is an evergreen fund and they do not have pressure to return funds to LPs, as is the wont with pure-play PE funds. This allows them to make genuinely long-term investments,” notes a source close to Premji Invest, adding that this fund may look at assets under management of $2.5 billion in another couple of years.

Nadathur S Raghavan, who co-founded Infosys with Narayana Murthy and some others, and exited the firm early, manages an early-stage venture capital fund, with a corpus of $35 million. The fund, which also has a significant PE interest, is managed by a professional Family Office, and assets under management are estimated to be around $500 million.

However, managers of pure-play PE funds say that corporates and family funds getting into private equity space should not look at this route as one to manage their wealth, but should approach this from a professional Limited Partner perspective.

“If the aim is to attract capital from typical global Limited Partners, then the structure of the GP should be to their liking. Such LPs have typically preferred independent professional PE managers to captive affiliated managers,” notes Raja Kumar, founder and CEO of UTI Ventures, a large India-focused PE fund.

“Of late, corporate-backed PE funds are increasingly targeting retail investors. This is not an ideal way to build a PE fund, as many retail investors neither have an understanding of the PE business, nor the patience that a long-term asset class such as PE demands,” Kumar says.

Industry analysts say these are early days for family-backed PE funds and so far there has not been significant impact on the PE industry. “The going so far has been rather uneventful for family-backed PE/VC funds. It all depends how one differentiates and gains prominence from a blockbuster exit,” says another PE industry player.

While a few HNIs take the route setting up a VC fund, some others like Jaithirth Rao (founder of MphasiS), Kumar Malavalli (storage networking evangelist) and Gururaj ‘Desh’ Deshpande (telecom networking expert) take the route of angel investors to keep the passion alive by seeding promising start-ups.

While there are pro and cons of high net worth families getting into PE, some others like Rajeev Chandrasekhar just roll up their sleeves and start new businesses all over again, to manage and spread wealth creation. Chandrasekhar, after exiting his mobile telephony service business for an enterprise valuation of $1.3 billion, has seeded business as diversified as media to aviation software to logistics to hospitality.

“The model Chandrasekhar follows is simple. Seed the business, bring in professional managers to run the business pretty independently and let the business grow with limited intervention, if at all,” notes a source close to Chandrasekhar.

Source: Business Standard

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