Exclusive: India’s Reliance spins out captive PE unit

The spin-off comes as Reliance Private Equity gears up to raise its second fund 

The private equity unit of Reliance Group, the Indian conglomerate owned by business tycoon Anil Ambani, has spun out creating its own independent firm, Private Equity International has learned.

Reliance Private Equity was formed in 2009 and has operated largely as an independent unit, although owned by the parent company.

However, its private equity management team has spun out the company and its India-focused fund, a $220 million 2010 vintage, now owning about 81 percent of the management company, with Reliance retaining around 19 percent, sources close to the matter revealed to PEI.

The firm will adopt a new name and brand in due course, but is waiting for regulatory approvals.

Aside from the name and ownership, the day-to-day running of the firm and its investment process will remain largely the same, one source said, adding that the seven-strong investment team, strategy and even offices will not be changed. Chief executive Ramesh Venkat will continue to lead the team.

While Reliance Private Equity’s first vehicle, Reliance Alternative Investments Fund – Private Equity Scheme 1, did raise capital from external investors, they were mostly domestic LPs and did not have any approval requirements in the case of an ownership shift in the company. There are key man clauses built into the agreements, but these will not be triggered by the transaction.

Clearly, the economics will shift under the new structure – a key element in the decision to spin out.

“In the longer term, the firm needs to worry about the economics for the team in order to be able to retain the team and attract high-quality people,” according to a source.

More significantly, however, the move comes as the firm gears up to launch its second private equity vehicle, which will target between $350 million and $400 million.

As the fund aims to raise capital from more institutional, foreign investors, it must be wary of the requirements and hesitations of the international LP community.

“Even though Reliance was [effectively operating as an] independent, a number of large foreign investors have reservations dealing with teams which are [joined] to corporate groups or banks,” according to PEI’s source.

“That is a fairly big disability when it comes to fundraising, future growth and things like that because a number of the sovereign [wealth funds], even some of the funds of funds and development finance institutions, [have] policies that restrict them dealing with teams, which are not entirely independent.”

Reliance Group is one of India's big family-owned conglomerates headed by Ambani, brother of Mukesh Ambani, chief of Reliance Industries and India's richest man. Reliance Group split off from Reliance Industries around 2005, after the brothers' father and Reliance founder Dhirubhai Ambani died and his business empire was divided up. 

Reliance Industries’ ownership itself has attracted some scepticism over transparency and cronyism. Just this week, The Economist wrote an extensive profile on the business and its leader (Mukesh) Ambani, whose personal fortune amounts to some $23.5 billion, raising questions over the ownership structure of the business and blurred lines of responsibility.

However, while Reliance Group has some business dealings with Reliance Industries, the two have no formal business or ownership connection, with Reliance Private Equity established years after the separation. 

While the management team at Reliance Private Equity had often discussed the possibility of spinning out in the past, the process was properly initiated in early Q2 this year.

As the firm’s first vehicle lies fully deployed and it gears up to make its first two exits before the end of this financial year, as well as eyeing foreign capital for its successor fund, the team’s decision to separate itself from its colossal parent company is timely.

However, the move may not necessarily be replicated by Indian counterparts.

Tata Group – another of India’s mammoth conglomerates – closed its $600 million Tata Opportunities Fund in 2013, India’s largest debut private equity fund ever raised, according to the firm. The vehicle raised capital from external investors, as well as investing in non-Tata Group companies, and following its $80 million July investment in Shriram Properies, the fund is already almost 50 percent deployed.

Similarly, Vishakha Mulye, chief executive of ICICI Venture, the private equity arm of ICICI Bank, told PEI last year that the firm was under no pressure to spin out – something more commonly seen in Western or developed markets as regulations tighten around the industry.

“The structure of private equity in India is different to how it is in the West. In the West, private equity was part of the banks. In our case it is through a separate company, even though it is 100 percent-owned by ICICI Bank. In the western structure, there was a worry about co-mingling risks that third party money can have with the proprietary money of the bank, which is not the case in India,” Mulye said.