At a time when a lot of general partners (GPs or PE fund managers) are going solo to woo the Limited Partners (LPs or investors) who have, time and again, asserted their preference towards independent funds, Motilal Oswal Private Equity, a captive PE arm of the Motilal Oswal group, says that it will never dissociate from the mother brand as its second fund hits the road later this year. The fund faced similar concerns (from LPs) when it raised allocations for its $125-million sector agnostic PE fund and a $40-million real estate fund focussed on residential projects in Mumbai. It has invested in 11 companies in the last four years and has a strong bias towards companies which are linked to the domestic consumption story. Vishal Tulsyan, CEO, Motilal Oswal Private Equity, talks about the fund raising process, emergence of HNI retail investors and the investment thesis, in an interview to VCCircle. Excerpts:-
How are you reading the current deal making environment? Are valuations realistic?
The market is very heated up and one of the key indicators is the number of public issues. I see a heightened activity in terms of deal making. For a mid-sized PE fund like us, we see a rise in secondaries. Large PE funds are constrained by size and want to enter the companies at a later stage. The valuations are high but more manageable than they were in 2007. That is because of a sense of discipline in the PE space. While they (PE funds) are sitting on lot of money to invest, they are also cautious about not overpaying.
What are your investment themes?
From the first fund, we have invested 70% and will invest the balance by end of year. We are looking at investing into companies that are consumption-oriented. We have been able to strike deals at fair and reasonable valuation. We have already signed term sheets with three companies. We are looking at food, auto and financial services.
When do you begin fund-raising for the next fund? What is the corpus you are targetting?
The roadshows might begin from the end of this year or November. We are looking at a total corpus of Rs 1,000-Rs 1,300 crore, twice the sum of the first fund.
How do you assess the domestic investor base?
Our first fund was a mix of domestic (35%) and offshore (65%) and we are hoping that the next fund will be a similar mix. Over the next 10 years, the way the Indian economy is growing, I see a substantial amount of savings pool emerging. On an aggregate basis, India could have a savings pool of $8-10 trillion. Also, a lot of fund-raising that was traditionally happening in offshore markets could come to the domestic market itself. Lot of money has been raised for real estate in domestic market largely from HNIs and retail investors. A major push to domestic fund raising will happen in 3-4 years by when funds, who raised money in the last 4-5 years, would have returned profit to investors.
Yours is a captive fund and a lot of LPs have asserted their preference towards independent funds. Any concerns on that front?
We did face some of these issues with the LPS during our first fund, where a few (LPs) go by a checklist of not to invest in a captive. And, those LPs will go out of our radar. We are confident about what we have built and the strengths Motilal Oswal, as an institution, is bringing to the table and we don’t want to dilute that. There are a certain set of people who will buy into this concept.
The association with the Motilal brand is a huge value-add to the fund management business. Motilal Oswal has a pan India network, very strong institutional equities network and we can use that platform in building those companies.
Does Mr Raamdeo Agrawal also help during the fund raising process? Do you stand to benefit considering Motilal’s huge relationship with institutional equities in raising allocations for the PE business?
Ramdeo Aggarwal, a well known investor in India, also the chairman of the company spends considerable amount of time in this venture. On every investment he gives a lot of time to the due diligence process. He helps us in deal sourcing, the process of evaluating an investment in the context of the macro environment and deal specific things to be looked at. Raamdeo (Agrawal) is also equally involved in the fund raising process.
He has an experience of over 25 years in the Indian markets and his investing approach is very similar to PE long-term buying strategy.
If you leverage the brand so hugely, how independent is the PE business then?
We are absolutely clear that PE as a business has to run independently and that is why even the fortunes of the management team are linked to the fortunes of the PE business. All decision making is independent. In two of our portfolio companies, where we did second round of fundraising, we went to third party investment banks.
If we can keep our conflicts in check, we see that this institutional alliance has a long way to go. In the Indian context, where a lot of things are relationship-driven, the institution has a lot of strength it can provide to the PE business. For instance, we have been able to provide a lot of value to our portfolio companies like helping them gain new customers, raise debt among others.
What is the compensation structure you follow? Is it constrained since you are a captive?
We follow the standard compensation structure which is 2:20 but the hurdle rate could be higher going forward. LPs are asking for better realignment of interests between the GPs and the LPs.
You don’t have an exit track record so to say, raising your second fund, say after four years of investment mode. What makes you confident?
In India, PE is at a very nascent stage and you have seen heightened PE only in the last 4-5years and it would be unfair to evaluate on the basis of exits. The investment opportunity in this country will be immense in the next 3-4 years. So the people who have been around in this industry for long and have gone through the ups and downs of investment cycle, and who understands the Indian economy are ideally very well positioned to make these investments. Fundraising is never easy, it’s always a challenge but what we have created in the last 4 years, on a very consistent, methodical and a patient way, puts us in a good step to raise our next fund.
