Axis struggles to unload private equity business

Shikha Sharma, managing director and chief executive officer of Axis Bank may have tasted success with the recent acquisition of Enam Securities’ investment banking and equities businesses.
However, she hasn’t reached anywhere near an exit from its private equity arm Axis PE.

Discussions on its sale have been going back and forth, primarily owing to disagreement among the investors — also called limited partners, or LPs — in the fund, two sources familiar with the development said.

Some time in September-October 2009, after Sharma took over (in June 2009) as the head of Axis Bank, a decision to spin off the private equity business was taken citing its non-strategic nature compared with the banking operations.

With time passing by and a series of discussions with domestic investors (LPs) not reaching any logical conclusion, Sharma is doing everything possible including sweetening up the deal for investors in the fund.

For instance, on November 19, two proposals were sent by Axis Bank in an official communication stating it wanted to sell the fund-managing entity to one of the three shortlisted bidding parties — Aditya Birla PE, Edelweiss Capital and Darby Private Equity.

The second option suggested was to sell the shares of five unlisted companies (investee firms) in which the fund has bought equity and distribute the proceeds thereby prematurely closing the fund - called as early dissolution in technical terms PE-lease.
Axis Bank officials could not revert to queries sent by email on Saturday.

DNA has, however,  learnt that these proposals were backed with sweeteners which, according to industry sources, is the main catch in the entire deal-making process.

For instance, in the first option, the bank has said that while it was selling the fund-managing entity, profits thus generated will be shared with the limited partners.

“How can that be done? It’s the bank’s profit,” said a source familiar with the development.

In case of the second option, the sweetener is in the form of a reduced management fee wherein, instead of paying the fees on the full committed amount, LPs will be charged on a reducing invested balance.

“This basically means if the fund size is Rs600 crore and only Rs400 crore has been called at various stages during the investment phase, the 2% management fee will be charged on Rs400 crore on a reducing balance method and thereafter fees will be charged proportionately as and when investments are sold,” the source added.

In fact, a few others spoken to in the private equity fraternity expressed that the approach adopted by Axis Bank to deal with this situation is not a common practice in the private equity business.

There was another option being worked that of taking the investee companies public and listing them on the bourses. However, the approach would have been suicidal because the companies aren’t matured enough to go for an initial public offering (IPO), said sources.

“Listing the investees would generally be done in the fourth year of the fund as they achieve a considerable scale and are mature enough to attract public money for growth. From what I understand, the fund is still in its third year and dumping stock in IPO will be very premature wherein the survival chances (of the investee companies) will be very bleak.

Besides, it would lead to significantly lower returns for the investors including Axis, which is the largest investor. All this when the fund is doing well and its NAV is up over 30%,” the source said.

Despite the inducements, DNA Money learns both proposals have been turned down by the investors (LPs). Another meeting is likely to be held this week  to decide what should be the course of action.

In 2008, Axis Private Equity had raised `600 crore for its infrastructure fund. India’s third-largest private bank contributed Rs230 crore.
 
Among its domestic investors include six leading public sector banks —- Punjab National, Bank of Baroda, Union Bank, Canara Bank, United Bank, Syndicate Bank and Corporation Bank. Together they have invested approximately `190 crore in the PE arm.

Media reports also indicated that The Essar Group, Reliance Industries, Mercator Lines, Era Construction and Serum Institute had also put in `100 crore via different investment vehicles.
The fund primarily focussed on picks and shovels of infrastructure investing in companies like Harish Chandra India Ltd (HCIL), Neesa Leisure Ltd, Corrtech International Pvt Ltd and Vishwa Infrastructures and Services and, Shalivahana Green Energy Ltd.
The investment were being made through the `600 crore Axis Infrastructure Fund-I.