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Rediff.com  » Business » Edelweiss, Lanco lead race for Axis' PE arm

Edelweiss, Lanco lead race for Axis' PE arm

June 10, 2010 02:51 IST

Infrastructure conglomerate Lanco Group and leading financial services firm Edelweiss Capital have emerged frontrunners in the race for Axis Bank's private equity arm. According to two people familiar with the developments, Lanco and Edelweiss have made the most aggressive financial bids among all the non-binding ones that have come in so far. The bids, they said, were in the range of Rs 30-45 crore.

The winner will potentially get to manage the Rs 600-crore Axis Infrastructure Fund. Lanco executives confirmed they had bid.

"The plan to float a PE arm within Lanco is over three years old," G Venkatesh Babu, managing director, Lanco Infratech, told Business Standard. "But, because of global conditions, our plan only got a boost four-five months back, and in that time, the Axis Bank opportunity came about."

While most see Lanco getting an entry point here into this new line of business, the company's management is still not clear if the fund--currently christened Lansin Ventures--will be part of the listed entity or an investment vehicle of the promoter family.

The plan, irrespective of the Axis Bank development, has been to raise a Rs 750-1,000 crore fund, with Lanco Infratech providing 10 per cent of the capital. The rest will be third party money. It can later be scaled up by another Rs 1,000 crore. "We want to capture the entire value chain. Infrastructure is a capital-intensive sector," said Babu. But, Lanco executives  added, they have not got any official intimation from Axis Bank yet on the issue.

Edelweiss Capital's Chairman Rashesh Shah could not be reached despite several attempts. Sources said Edelweiss had assets under management in terms of real estate and other special opportunity funds, but still don't have a classical PE piece, and the Axis PE can be a good fit. People close to the deal said it would be wrong to say a frontrunner has emerged at this juncture. Aditya Birla Private Equity, the Shapoorji Pallonji group and IL&FS Investment Managers are also very keen participants, they said.

The bank's spokesperson said: "We believe that running a private equity business is not our core strategic proposition. As a result, we have announced our intent to exit from this business. We are still in the process of evaluation. We will arrive at a decision after our discussion with the LPs (limited partners) and other investors of the fund, in due course."

Sources added that it's work in progress and there's still a long way to go before the deal closes. Most of the financial bids which have come in are very close to each other. The financial element will not be the sole criteria while selecting the winner.

The final call will be based on a combination of factors. Along with financial bids, other points like execution capabilities, experience and track record, credentials and the comfort factor of the LPs and other investors with the new suitor will also get weightage. "The ultimate call will be that of a consensus; nobody is in any hurry," the source said.

Consensus will be key, as serious differences have also arisen between the fund's different investors and the anchor over the future course of action. In 2008, the PE arm of Axis had raised Rs 600 crore ($148 million) through its first fund, the Axis Infrastructure Fund. Axis Bank has invested Rs 230 crore, and is, therefore, the anchor investor. Public sector banks such as Canara Bank, Bank of Baroda, Union Bank, United Bank, Corporation Bank and Punjab National Bank have put in Rs 185 crore.

Sources said large companies like the Essar Group, Reliance Industries, Mercator Lines, Era Construction and Serum Institute also put in a little over Rs 100 crore via different investment vehicles as part of treasury operations. The entire list of companies could not be independently verified. So far, the fund has invested around Rs 400 crore in five companies.

But, ever since Axis Bank made its intention public that it would be looking at divesting this portfolio as part of its medium term plans, the investors felt offended. Their argument has been that they put in their money based on Axis Bank's involvement in the project. "The money was riding on Axis' brand equity and reputation…They are the country's third largest private sector lender. Now, middle of the road, there can't be a course correction.. It's a breach of faith," a chairman of  a PSU bank told Business Standard on condition of anonymity.

"We have to see what other investors say. But, definitely we will be more comfortable if some known company is managing the fund, and takes the responsibility. That will give us lot of comfort," reiterated Bhaskar Sen, chairman and managing director, United Bank of India.

Some of the corporate investors are equally unhappy with the move, wondering if the PE fund will remain influential if the ownership of the asset management company changes hand. More, they are uncomfortable at the prospect of a private sector rival emerging the winning bidder. "We compete for projects. Suddenly, we can't have my business rival managing my investments," said a corporate promoter who is also an LP in the fund.

Lanco, sources said, is likely to face hostility from the incumbent fund managers as well, despite having banking relations with many of the key LPs. Edelweiss, too, would need to convince them that their lack of experience would not be a major handicap. In the past, these LPs had blocked similar moves when the PE fund's top managers tried to buy out the promoter in early 2010. Their argument was the same: It's better to trust the bank than a select few professionals with their money.

What is the road ahead? Sources said with Axis Bank's annual general meeting and board meeting out of the way, they will once again meet and try to convince all the LPs to come on board and support their strategic decision. Sources in the know said Axis Bank's management will be telling each LP that they had put maximum capital in the fund and they are not taking that money out. And, hope the LPs will buy their point.

The bidders who get selected will also have to get a no objection certificate (NOC) from the LPs. Agrees Sen: "The meeting would be attended by all the participating banks and Axis PE … We cannot give an NOC like that. We have to examine the implications. There could be difference of opinion among banks…but for anybody other than Axis,  we will have to do due diligence and proper study before we take a call."

Arijit Barman and Namrata Acharya
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