In August, Reliance Private Equity successfully spun out from its parent company, Indian conglomerate Reliance Group. The deal was initiated a few months earlier and preceded the launch of the firm’s second private equity vehicle.
The spin-out includes Reliance’s debut private equity fund, a $220 million 2010-vintage, and its entire management team – who now own a generous 81 percent of the general partnership (Reliance Group is hanging onto the rest).
Aside from name and ownership, the day-to-day running of the firm and its investment process will stay largely the same, with the seven-strong investment team, strategy and even offices remaining unchanged.
Two factors seem to have driven this move. First, the economics of an independent boutique are obviously more attractive to the management team. And second, according to one source close to Reliance, its LPs had expressed a preference for investing with independent GPs.
So in addition to providing comfort around economics and alignment of interest, the move is intended to attract international investors as the firm gears up to raise its new vehicle, which is targeting between $350 million and $400 million.
“Even though Reliance was operating independently, a number of large foreign investors have reservations about dealing with teams linked to corporate groups or banks,” another source says. “That’s a fairly big disability when it comes to fundraising and future growth, because a number of the sovereign wealth funds, even some of the funds of funds and development finance institutions, have policies restricting them from dealing with teams that are not entirely independent.”
Sources say investors’ concerns about captive units usually surround possible corporate influence on investment decisions, plus a lack of alignment of interest between the management team and LPs.
However, in India, there’s a common belief that it’s beneficial to be part of a larger group.
Tata Capital, the private equity arm of the Indian giant Tata Group, says it has no plans to spin off from its parent. In fact, its connection to the conglomerate is integral to the firm’s strategy and offering, and the main attraction of the group for its LPs, according to a source close to Tata.
“Across sectors, Tata has a knowledge bank of people – so if they want to diligence a company they have access to so many different people who know that company. And Tata doesn’t just provide a brand; the network is very meaningful in finding deals.”
Offshore LPs certainly seem to approve. Tata Capital has about $1 billion in assets under management, with around 75 percent to 80 percent coming from international investors. Tata Opportunities Fund, a $600 million vehicle raised in May last year, raised $550 million from external investors, mostly international, with only $50 million coming from Tata Group itself.
The key, sources suggest, is to ensure that the internal management team is properly incentivised, and ensure that the benefit of being tied to the larger conglomerate – such as contacts, dealflow, influence and financial muscle – outweigh the negatives.
As Archana Hingorani, chief executive of IL&FS, explains: “It is obviously a preferred position for most international investors to find [independent] fund managers. But if you look at the past five years and the way the world has [changed] post-global financial crisis, [LPs] have become more comfortable with an institutional framework, as there is a greater ability to control or influence [portfolio companies].” ?