ICICI Venture wants more bank for its buck

By: Shishir Prasad/Forbes India

Under its new chief Vishakha Mulye, ICICI Venture is learning to strike a difficult balance between building an entrepreneurial culture and also tapping ICICI Bank 's vast network of relationships. The fate of the country's biggest private equity firm could well depend on it

It has been six months since Vishakha Mulye took over as the CEO and managing director at one of India's largest private equity fund, ICICI Venture. Things have kept her occupied. She is in the middle of raising a new fund. This is a Rs 2,500 crore fund with an option to add another Rs 1,500 crore if investor interest is strong. Then she has the task of rebuilding the team that was left weakened by the exit of senior executives like Renuka Ra­mnath, Shailesh Pathak and Shweta Jalan three months ago; and Bala Deshpande and Aluri Srinivasa last year.

Then there is the minor task of refining the investment strategy of the fund as well. But that's one thing Mulye will find the easiest to tackle. "We will continue doing buyouts but we will also add growth investments. We think infrastructure will be big and then there will be opportunities when corporates hive off non-core assets," says Mulye.

But her most challenging task will be to recover the satellite of ICICI Venture that was trying to gather escape velocity and dock it firmly with the mother-ship of ICICI Bank.

No, ICICI Venture wasn't trying to break away - not a chance. It is just that when ICICI Venture made a transition - sometime in 2004 - from being a venture capital firm to a large private equity investor, perceptions changed. Investors in the fund thought they were now dealing with a local heavyweight a la Blackstone. Perhaps, so did the team members. In the last five years, ICICI Venture has done the most number of buyout deals. This is to private equity what the Tour De France is to cycling: A test of skill, endurance and psychological strength to last the distance. Only the biggest and toughest attempt it because the risk of failure is high.

Renuka Ramnath, whom Mulye succeeded, knew that to get a seat at the buyout table she had to have a purse fatter than what parent ICICI Bank could afford. To get that increase in fund size, ICICI Venture raised a large amount of money from third-party institutional investors. Ramnath was seen as someone who had taken a firm that managed all of USD 225 million in 1998 to the USD 1.8-billion mark in 2008, did the toughest deals and most importantly was making money on those deals. So if it walked like Blackstone and roared like KKR, it had to be fed like those beasts, in terms of compensation. That's when the gap between the perception and reality opened.

Investors in ICICI's funds and employees thought the team deserved more of the profits the team was making. In private equity business, investors pay 2% in asset management fee and 20% of the profits to the team that manages money (known in industry parlance as carry). This is a steep charge but it is paid because most of the investment is in illiquid, unlisted companies which would be hard for an insurance company or a public sector bank to invest in directly. This 20% profit then gets divided differently if the private equity firm is an extension of a bank, is a standalone fund or belongs to an insurer. Theoretically, how the 20% is divided should be of no concern to investors; they should take their 80% and be done with it. But then there is a thing called as "the alignment of economic interests". And this is not the first time that ICICI Bank has had to deal with this. It goes back a decade, to 1999.

At that time A.J.V. Jayachander and Nitin Deshmukh used to be the key guys at the fund. Though fund sizes were really small, the largest was million, all the four funds of that time made some great investments in companies such as Big Bazaar, Naukri, and Biocon which were then in its infancy. When these companies went public, ICICI Venture laughed all the way to the bank. Its funds had an internal rate of return (IRR) of more than 45% on the capital it had deployed. That was the good part.

The sad part was that ICICI Venture in those times had no system of carry (a share of the profits for the key team members in the fund).
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