Renuka Ramnath, Founder, Managing Director & CEO, Multiples Alternate Asset Management, on ‘Private Equity – A journey of Sahayog with Indian Entrepreneurs’

Renuka Ramnath, Founder, Managing Director & CEO,Multiples Alternate Asset Management, on ‘Private Equity – A journey of Sahayog with Indian Entrepreneurs’

It was fascinating to see how many people were honoured here today for raising money. In my business also it’s all about raising money, even before we think about where to invest. When I started out in ICICI Venture, it was like pushing a wall to raise money for this asset class because nobody understood the need, relevance, and impact of alternate investing.

I launched myself on this journey to help entrepreneurship and see its benefits and ripple effect on the economy. I’ve been very fortunate to have had a long, successful, meaningful innings in ICICI, a pioneering institution for many new financial products.

Raising money for private equity, explaining the difference between private equity and venture capital, and why India needs private equity when we have such a vibrant capital market. What does private equity do beyond just giving money to entrepreneurs? Why is there such tight documentation? Why do we as entrepreneurs have to cede so much of rights andcontrol to you as an investor? What if you derailthe journey? How can I be sure that you have understood my business and my dreams before Isign on the documents that you have asked me to sign? These are questions I had to answer before I,
myself, became an entrepreneur.

For people from Chennai, they will know that there is a very popular saying in Tamil: ‘Only a
snake knows the legs of the other snake.’ This journey of transitioning from ICICI to becoming an entrepreneur in my own right got me closer to entrepreneurship.

Today, when I engage with other entrepreneurs in providing capital, I can empathise with every question they are dealing with. I look them in the eye and say, “You cannot help but look at me
as just an investor but please trust me.” I’m an entrepreneur in my own right. I know why issues like giving away shareholder rights, stock options
to employees, or looking at the valuation of the
company bother you. Am I selling my company
cheap? And, if I partner with you, will I be able to
fulfill all my dreams as an entrepreneur?

The turning point in my life was the three months I spent at Harvard Business School in 1999 doing an advanced management programme. The case studies and the way Harvard Business School
conducts the entire programme is all for middle management to senior management executives. It was very impactful, and I felt that if I don’t engage in entrepreneurship, my life is not worth living. The near-death experiences of a Starbucks or Nike founder who went on to build those world-beating companies that stood the test of time, market challenges and competition, was very inspiring. I came back and told my boss, Mr. Kamath, that I don’t want to do what I’m doing, which in itself was very interesting. I pioneered structured finance in India in much the same way that I pioneered venture capital and private equity. People would ask what is structured finance, what is off balance sheet
financing, how can you take future receivables and securitise it and take it off my balance sheet?
While that was fascinating, getting closer to entrepreneurship was pulling me like a magnet.
I set up several e-commerce ventures at that time, because e-commerce was the biggest thing
happening in the late 90s, using the ICICI Bank platform, a little bit of capital from ICICI and
raising a lot of third-party capital.

I don’t want to go on about my journey but use
this limited time to explain how Multiples, a firm
I founded, where I’m responsible for laying some
of the founding principles and value systems,
will hopefully outlive me and many of my other
colleagues who have been there since inception.
I like to believe that Multiples has its own unique
way of engaging with entrepreneurs in providing
capital. So, we pool capital. We don’t invest any
one institution or one individual’s money into
one enterprise. Ours is a pooled vehicle. We raise
money in India and overseas. We pool them in
different entities. The money raised in India is
pooled under a SEBI registered vehicle in India,
under the Alternative Investment Funds guidelines.
And the funds that we raise abroad, we pool them
either in Singapore or Mauritius. These have been
very common destinations. And, more recently,
the Indian government has thought of GIFT City,
the International Financial Centre in Ahmedabad,
which has very ideal regulations for pooling.

After we pool this money, we take both these streams of capital and employ them in the underlying portfolio companies. The obligations to the investor that a fund manager like ours goes through is quite phenomenal. It’s called a 10-year blind pool money because at the time that an investor invests, he doesn’t know where this money is going to be
deployed because after we raise the money, we go
and find the deals. But we give a broad thesis as to
which sectors we will be investing in, what stage we
will be investing in, what risks we will take, how
we will manage the risk, what returns you should
expect over what period of time. And then there
are a whole host of rules around how I will send a
drawdown, notify you when I sell, dispose of your
asset, how will I return the money back to you,
what I can do and what I cannot do, etc.
There is a host of governance and regulation which
the investors and regulators place on us. You take
this money and go and construct a portfolio. The
second important thing to remember about our
businesses, we are in a portfolio business and not in
a single asset business. Typically, if you lose money
in one deal, investors will become very agitated;
they will not look at the nine other deals which are
making a lot of money. But this one deal, which has
lost money, will bother them no end.
It is important to remember that this is a portfolio
business. When you say portfolio business, I’m not
coming from the point that I am allowed to lose
money in some deals. Far from it. When we make
an investment, we say, none of our deals can lose
money. When I say portfolio, I really mean the
risk management around a portfolio. You have the
opportunity to build a portfolio, so you can apply
your mind and think about diversification. When
you think about diversification, it’s not common
sense, very top of the mind diversification. Like, in
one company, I will not put more than 5% of the
funds. Or in one industry, I will not put more than
25% of the funds.
When we think about diversification, we think
about currency risks, macro risks, exit risks. How
many of my companies will have to exit in the
capital market? And if the capital market goes shut
out for a couple of years, my investors will not get
any money back. Therefore, I will not do this deal,
because I will add to the same type of risk. As we
start building the portfolio, our degrees of freedom
dramatically reduce because of a very nuanced way
of thinking about diversification.
I’ll give one example. In one of my portfolios, I had
incubated affordable housing finance companies.
We got hold of two very aspiring, very confident
young professionals who wanted to go out and
build a housing finance company. It’s a very unusual
deal for a private equity firm to do. But because
most of us in my firm come from a financial services
background, we have built many businesses. We
had the confidence to take that risk.
After we did this investment, one or two years later,
we backed another very proven professional to go
and set up an NBFC. But we were the only investor,
we were a 40% shareholder. And this gentleman
would go out and say, “I’m backed by Multiples.”
So, we already had one affordable housing finance
company saying, you know what, I’m backed by
Multiples. And in the same portfolio, you have
another company. And the combined exposure in
that portfolio was about 15 to 17%.
So, our risk department said, this will be the last
deal of this nature we will do in this portfolio.
Because if something happens to Multiples, the
portfolio should not suffer. It’s not just about the
industry. How many companies can you have in
your portfolio which go out and say, I’m backed by
Multiples and therefore you, SBI, give me a loan.
You, Union Bank, give me a loan. So, it’s a very, very
nuanced way of thinking about how you construct
the portfolio.
Having spoken very fleetingly about the pool and
portfolio nature of our business, I want to quickly
discuss Sahyog. Why have I called it Sahyog? The
one thing that Multiples is guarded fiercely against
is to sit across the table with the entrepreneur. We
are on the same side of the table as the entrepreneur.
When we make an investment in a company, the
dream of the entrepreneur, the possibilities in that
enterprise, is as much ours as it is of the entrepreneur.
And that’s how it becomes a Sahyog.
A couple of examples. PVR – since most of you
in this room will be moviegoers, you would have
experienced the product. I backed PVR when it had
just 11 screens. In 2003, Mr. Ajay Bijli, the founder
of PVR, had just come out of his partnership with
Village Roadshow. They asked Ajay, who was a
very young entrepreneur, just 11 screens only in
Delhi, to buy their stake out. The turnover was like
Rs 20 -25 crores. Where would he go for money?
He turned to private equity and that’s how we got
to know each other. I started with a 48% stake in
PVR, and the family had the balance 52%.
You can imagine the nervous feeling this
entrepreneur would have had to have one investor
with such a large stake. I was over-sensitive to
this feeling. So, if Ajay Bijli called, it was more
important for me to return the call in 20 seconds.
I can’t have him nervous even for a minute and
in every question that would stand in front of
us – whether it was a fight with the distribution
company or some unreasonable negotiations with
the real estate owners or major problems on the
entertainment tax breaks – I had told Ajay that I
had just one requirement from this investment. I
told him, it was not the returns because I know you
will work hard. But bad news has to come from
you first. Good news takes a thousand doors to
reach me and if it doesn’t reach also it really doesn’t
matter.
Till date, even in 2023, when I am less than a 2%
shareholder in that company, when there is bad
news, he will call me first. He’ll say: 20 years back
you said bad news has to come first. You build a
strong connection with the entrepreneur.
Our business is one of showing extreme sensitivity,
care, maturity, and commitment in every step of
the transaction. Sahyog is not opportunistic. You
can’t do this business like that, or you will have a
very short, very disreputable life. If you’re building
a serious private equity business, you’ve got to
understand the entrepreneur and the business and
every move and what impact it has on the overall
dynamics of the industry, the company, your
reputation, and what happens to every stakeholder in the company.
People ask me that you’ve worked for 40 years, what
are you really working for? What more do you have
to prove? It’s not about me at all. As long as there
is entrepreneurship, as long as there is need for risk
capital, as long as there is need to communicate
what an understanding financial partner is, what
magic they can do to an enterprise, I want to be
committed to this business. It’s not about how
much money I have made or how many deals I have
done. It’s not about me at all. That’s the beauty of
this business.
Moving on to some of the challenges we face in our
business. An example. I invested in this company
promoted by Jignesh Shah called India Energy
Exchange. I valued the company at that time in
a very accurate way at Rs 505 crores. It was Rs 5
crores that got me the deal. All my competitors had
valued that company at Rs 500 crores. And I knew
they would bid at 500 because the company had
announced a reserve price of 500. So, I put a bid of 505 and got that company. And after I invested, within two months, Jignesh decided to double the
tariff.

So when I invested in this company, it had a PAT of Rs 25 crores. And in the very next year, which was like nine months away, we are looking at a PAT of Rs 50 crores. I was telling myself, Renu, how lucky can you get, you’re a woman with the Midas touch. You don’t have to do anything, just be Renu and life is set. Right? And then, one fine day, I opened the newspaper to see that Jignesh is no more qualified to hold a share in any exchange. Jignesh is the promoter of this company. Financial Technologies, another of Jignesh’s companies, is the technology provider of India Energy Exchange. So, there is a very strong nexus. Our exchange runs on his technology. He was the karta dharta of the company. The CEO was appointed by him. The board was in his control.

Everyone would be scared to speak when Jignesh was in the meeting. And this guy is told by the government that you have to sell your shares tomorrow. The moment you change your avatar from an owner to a seller, your objective completely changes. Now, as a seller, I need to maximise.
I don’t want to take anything from this company.

The destiny of this company is not in my hands. Because I have to maximise. Because this unfortunate thing has befallen me that the government has told me I cannot be an owner. So we, as minority shareholders, have lost a very solid promoter. Our entire technology agreement is hanging by a very thin thread. And your most important ally has become your worst adversary. Because he is now just looking to maximise.

What do you do? I slipped into Jignesh’s shoes instantaneously. I went to Jignesh, we didn’t know when he would be taken to jail. I said, look, you’re not looking only to maximise the value. We have to find a good partner. You have to trust me for it. We all came in on certain assumptions and promises,
which have been held untrue by time. So, we took control of those shares in a manner of speaking. With forensics on the company, we went to CERC, the regulator, and we told them that everything is kosher and who do you want as the chairman of the company?

We knew that if we brought a good government servant as chairman, it would give confidence to the government. So, we brought such a gentleman. We brought other people of repute. We took resignations from most of the board members and brought in a new CEO. One of our own shareholders, another government company, sued us because we wanted to buy the technology from FTIL and protect the company. So, you go through some really absurd situations when you’re building a business. We fought that case and won. We integrated the technology, moved the team, and took the company public. Today, that company is also worth Rs 15,000 crores in valuation. And it was looking at zero when this event happened. I wanted to write this asset down to zero in my books. That was how close we were to death in that company.

Entrepreneurship is about going through these trials and tribulations with a very solid focus on the long-term potential, keeping in mind all the stakeholders, always doing the right thing by the company and building every company from your heart and with passion brick by brick to make sure that enterprises, the goals of enterprises, the vision and dreams of entrepreneurs, the hard work of employees, and all the expectations of the customers and everybody in the supply chain is always honoured while markets and other reasons can throw pretty nasty challenges at you without
warning.

ROTARIANS ASK
Private equity fund and listed stock – which should one choose?
There is immense interest now in the alternate asset class. The way to think about this asset class as opposed to capital markets is that we play for Multiplying capital as the name of my firm suggests.

It’s not an IRR game; it’s a money multiplier game, it’s a compounding game and you compound over very long periods. When you stay with an investment for 4, 5, 7 years, you are compounding at 30-40 percent over such long periods.

Second, it’s an insider’s game, not outsider’s. In a listed entity when the stock price goes up you are acting with so much helplessness because what are you dependent on? Research reports. What are those research reports dependent on? Conversations with the CEOs, CFOs, and whatever else they gather in the market.

Whereas we run our own companies and are deep insiders. We know precisely how much cash accounts are going to go bad. We know exactly what’s happening to our inventory. In the example of IEX, if you are a public market investor in IEX and you read the news, saying Jignesh is to sell and he might go to jail. What will you do? And what will I do? I will say this is a great time to take control of the company. In fact I put more money at that time because for the incoming investor I want to show confidence that I’m putting money exactly on the same terms that you are putting, so it’s an insider game.

Third, if you look at the track record of performance, like in public market investors and private market investors as well, you have high performing managers and not so high performing. So, there is a lot of data, you don’t have to invest blind at all. If you take a stock of, let’s say, 20, 30 managers and look at the track record of the top 5 to 8 managers, they would have delivered anywhere between 7 to 10% higher year on year relative to the public market equivalent.

So, when we make presentations to prospective investors, we show how much money we made relative to public market equivalent.

Lastly I would say that this portfolio is very different from what you get in public markets because by and large we are investing behind emerging stories and these emerging stories could well be turnarounds of companies.

But I will say don’t get carried away by the mistakes I have seen people make. They see one or two successes and get carried away: “He invested in a company. You know what a great guy he is.” Please study the entire portfolio. Please study over how many vintages this manager has invested and taken money. Look at the volatility, stability of the team. Look at which other investors have invested in this company. Hear about the governance practice of the firm. How will the firm perpetuate itself ?

What if one or two people leave the firm? What will happen to your money? What are the systems that they have? What is the policy they have put in place to make sure that your money is safe no matter what happens to the firm? So, there are ways to know this. One simple way to do this is to just ride off another large institution. So, if you see SBI or a large global institution as an investor somewhere, it will be an easy call because you know they have done all the hard work and you can… Otherwise this temptation to get carried away by one or two
success stories.

So in our industry we use a term called DPI that is a distribution-to-paid-in equity. Look at that. Don’t look at NAV (Net Asset Value), that’s paper money. But how much did you actually take cash and give me cash on cash for my investments? How quickly have you done by divesting how many assets? By
what means? How have you valued the rest of the portfolio? What is the volatility in the valuation of those? Who are your auditors? How do you exactly value the portfolio? These would be the right kind