icici venture funds management company ltd Management discussions


ICICI VENTURE FUNDS MANAGEMENT COMPANY LIMITED ANNUAL REPORT 2007-2008 MANAGEMENT DISCUSSION AND ANALYSIS OPERATIONAL REVIEW: Year in Retrospect: The private equity market in India has dramatically changed over the last few years. The industry is witnessing increased investment activity and growing deal sizes. Your Company continues to be a leader in the Indian private equity market with significant growth in assets under management over the last few years. Your Company has been voted as the Indian Private Equity Firm of the year for 2007 by readers of Private Equity International and subscribers of PrivateEquityOnline.com. This recognition reflects your Companys ability over the years to successfully execute groundbreaking and profitable transactions and establish a reputation as a leading private equity player in India. The investments made by various funds under management or advised by the Company reflect a distinct approach to value creation with innovative structures and a focus on relationship building. IAF Series 1, a private equity fund raised in 2003-2004, is in divestment mode and has already returned over 145% of its corpus to its investors. India Advantage Funds III & IV (Real Estate Funds) were raised in the year 2005 with the support of some of the most respected financial institutions in India. The capital of the Real Estate Funds stands fully committed as on March 31, 2008 with a diversified portfolio of investments in the sector. India Advantage Fund Series 2 (IAF Series 2), another private equity fund raised by your Company in 2005 - 2006, has so far committed roughly 65% of its corpus. Considering the current pipeline deals, IAF Series 2 is expected to be fully committed by September 2008. Last year, your Company launched a new fund called India Advantage Fund VII (Mezzanine Fund). The Mezzanine Fund is the first of its kind in India, and has made 3 investments to date. The Directors of your Company have great pleasure in informing you that, during the year under review, Rajeev Bakshi joined the organisation as Joint Managing Director. He will strengthen the senior management of the Company and also offer immense value to the deliberations of the Board. Portfolio and Fund Strategy: As of March 31, 2008, your Company was Manager/Advisor to Funds aggregating Rs. 95,517 million. The India Advantage Fund Series 1: Your Directors are pleased to inform you that IAF Series 1 is in the divestment mode and has till date distributed Rs. 16.11 billion to its investors against a corpus of Rs. 10.90 billion. India Advantage Fund III and IV (Real Estate Funds): The Real Estate Funds raised by your Company have been fully committed with a diverse mix of projects such as Commercial, Retail, Residential, Township and IT Parks, with niche developers as partners. The Real Estate Funds have sourced deals across Tier I, Tier II and Tier III cities. The Company has recruited additional investment and project monitoring professionals in line with its strategy to scale up operations and ensure timely execution of projects through tight project monitoring. India Advantage Fund Series 2 (IAF Series 2): IAF Series 2 has built a well diversified portfolio around the Companys articulated investment approach through disciplined investing. Despite an increasingly competitive investment environment that raised overall valuations in the market during calendar year 2007, IAF Series 2 maintained its disciplined investment approach and managed to clinch investment opportunities at attractive valuations in high growth sectors. Your Company is seeking to identify unique sectors and opportunities for deploying the balance funds of IAF Series 2. Your Company believes that given the continued growth in the private equity industry and the existing deal pipeline, IAF Series 2 will be fully committed in the next fiscal year. One specific segment in India where your Company has identified a large opportunity is the health-care provider segment in India. This sector is at an inflexion point with significant increase in private spend anticipated over the next few years. IAF Series 2 has started an initiative to establish an integrated healthcare company through a diversified network of service providers across India. Your Company has also worked closely with a leading player in the automotive sector in India to enable IAF Series 2 jointly acquire an overseas gear manufacturing company that would leverage Indian manufacturing capability and markets. This transaction would position your Company as a serious player in cross - border transactions. Mezzanine Fund: During the fiscal year 2008, India Advantage Fund VII (Mezzanine Fund-I) began its investment operations. To date, three investments have been approved by this Fund. The deal flow for Mezzanine Fund - I is robust and the Fund has been selective in making its investments. The Fund has been witnessing maximum demand from small and mid market growth companies that seek mezzanine finance in order to postpone equity dilution. Your Company is making efforts to popularize the concept of mezzanine financing in India, as it expects this form of financing to grow significantly in future. Outlook: Your Company is constantly evaluating investment opportunities in India and overseas, and is taking initiatives to maintain its leadership position and continue to be a first mover in the private equity industry. According to published statements by the Indian Government, it is estimated that over USD 500 billion of investment is required to address infrastructure requirements such as power, roads, airports, etc. in India. Availability of sufficient and adequate infrastructure is one of the most critical requirements to sustain the growth of the Indian economy. Your Company believes that the investment requirements of the infrastructure sector present an opportunity, and expects more Public Private Participation (PPP) in this sector. Your Company has set up an Infrastructure Fund called India Advantage Fund IX during the fiscal year 2008 and this new Fund is expected to take shape in the next fiscal year. Your Company is also making efforts to raise funds overseas and for this purpose it is considering setting up of representative offices abroad. A detailed business plan in this direction is being evolved. The Board expects that the current pipeline of private equity investment proposals would translate into IAF Series 2 being fully committed by September 2008. Your Company maintains a positive view on the outlook for the private equity industry, both for the growth capital and buyout segments of the market. Given your Companys positive outlook and its considerable expertise and knowledge of private equity transactions, your Company proposes to raise a new private equity fund based on similar investment themes as IAF Series 2 in the next fiscal year. The deployable corpus of the Real Estate Funds is fully committed and, given your Companys positive view regarding the real estate market in India, it is proposing to raise a new real estate fund in the next fiscal year. As the Indian economy continues to grow, your Company feels that opportunities to invest in strategic real estate and infrastructure related real estate assets would emerge. The thesis of this new real estate fund is to identify and invest in such assets. In order to focus on client relationship building, investment sourcing and project monitoring in the Northern parts of India, your Company proposes to set up a branch office at Delhi. Besides, it also proposes to set up a team focused on Real Estate opportunities at its Bengaluru office. Over the years, your Company has maintained a vision of being a leading alternative asset manager in India across multiple asset classes and to build an institution that would be among the best in its class globally. The Board is confident that, given the success of past and current funds managed by your Company, the increased depth of the management team, the emerging opportunities, geographical expansion of the investment teams presence into multiple cities, and raising new funds across private equity, infrastructure and real estate in the next fiscal year, your Company will move forward rapidly towards achieving its vision.