PE As Crucial As Commercial Banking: Renuka Ramnath, Multiples Alternate Asset Management

Image: Joshua Navalkar

Renuka Ramnath
Age: 53
Designation: Founder, Multiples Alternate Asset Management Pvt Ltd
Career: Crompton Greaves; ICICI Bank Ltd and ICICI Venture; Multiples Alternate Asset Management
Education:  BE, Veermata Jijabai Technological Institute, Mumbai; MBA, University of Mumbai; Advanced Management Program, Harvard Business School
Interests: Home design and improvement, cooking, listening to music


Q. Where is private equity as an asset class headed?
Private equity will emerge as big and as vital as commercial banking in the country. For someone looking for long-term risk capital, the first thought will be to go to a PE investor and not to the capital markets. There is a reason for this shift. Twenty years ago, banks were providing risk capital. Today, they don’t offer a single rupee of risk capital. They are focussed on commercial banking and work selectively with long-term loans.

Further, the markets only offer debt products to corporates that are backed by good ratings as well as sound securitisation and documentation. Therefore, long-term risk capital will become the domain of PE investors and only significantly mature companies will go to the capital markets.

Also, the reliance on capital markets has reduced. And it’s not because promoters have started thinking differently; capital markets have simply shut their doors on mid-cap companies. This transition is making PE funds extremely crucial. You will see unlisted companies with revenues of as much as Rs 4,000 crore becoming available for PE investments.

Q. What led to the launch of your second fund—this year when limited partners (LP) were not bullish on India—amidst such dampened sentiments?
Waiting for the so-called right time is not in my DNA at all. In fact, when everything is confused and cluttered is the time I feel I should launch. Then, when things settle, I am ready. If I launch when everything has played out, I would have missed the bus. One has to be a little ahead [of others] in this industry.

We are tapping our existing investors for the new fund and we will broaden the investor base once we have commitments from them. Nothing will change in terms of our investment thesis: Our ticket size may increase to Rs 200-250 crore from an average of Rs 150 crore at present. I am hopeful that more companies will need capital for expansion, which will give us opportunities for more primary investments.

Q. How do you plan to convince your LPs when 65 percent of PE transactions in India have not yielded returns?
I don’t belong to the school which believes that in a portfolio of 12 investments, three or four will provide returns to the fund, three or four will become duds and three or four will be average. For me, it is important that almost all, if not all, investments do well.

Some of them may be stars: 10 to 20 percent of the portfolio could return five times the investment made in those companies. But all investments must give returns in the range of 18 to 30 percent. There could be a small portion that gives returns of 60 to 70 percent. This collectively gives a portfolio an average return of 23 to 30 percent. For me, that is a very well performing fund. If they have an approach that some investments will become lemons, they will take risks they don’t understand. Clearly our investors have not given us money to bet with their capital. We need to take informed decisions.

Q. Where are the next big avenues of opportunities and returns for PE investors?
The next phase will be about setting up businesses around experienced professionals. This is at a nascent stage right now but is picking up fast. Restructuring [of debt] hasn’t happened in any significant way, despite a lot of investment lying idle in companies. The capital is either residing in the balance sheets of large companies or as NPAs in the books of banks.

The business of restructuring, using the existing investors’ capital and making it productive, is a big opportunity for PE firms. We need a facilitating environment for that; also, everyone has to understand the real value of the asset and how to restructure the debt.

Then we have this big chunk of physical assets being held by PE investors—we have not even scratched that surface. When you walk into any hotel in the US, you will find a sign indicating that the property is owned by some fund, some LLP or LLC. These are all fiduciary vehicles—they are not owned by any single family. Some of our large infrastructure assets will also come into the real estate or infrastructure PE market.

Private capital will create such assets in the country. This would be a $50-60 billion business in a decade from now. It’s a white space that’s available to people who can build expertise and raise funds.

Q. Your firm, Multiples, has invested over 70 percent of its $405 million maiden fund, which was raised in 2010. There is a clear preference for financial services and big bets on companies like PVR.
In the financial services space, we have invested in Indian Energy Exchange, Cholamandalam Investment and Finance Co, and South Indian Bank. Financial services form an important space for everybody, one which we can’t ignore. We will always put 15 to 20 percent of our funds into financial services. It’s a natural capital-seeking area. But it is also an expensive space—you don’t get cheap valuations.

As far as PVR is concerned, post the Cinemax merger the company’s footprint has become absolutely massive and it clearly dominates the market. I love this business because you are not inculcating a new habit. People have been watching movies for the last 100 years and will continue to do so. We had times when we thought it was the end of the story… We lost footfall due to IPL matches, DVD and cable TV. However, movie-watching is a deep-rooted habit and people like to go to a theatre. It is a very important form of entertainment. Consumption is assured.