Outlook Business 27 Dec 2008
Why private equity loves this man?
Shriram Group Chairman R Thyagarajan has a way of attracting and keeping PE firms happy. At last count, he had 25 investments in 7 group firms
Sriram Srinivasan
If R Thyagarajan, Chairman of the Rs 5,000-crore Shriram Group, calls a meeting of all institutional investors with stakes in his companies, he would have representatives from most of Wall Street’s big names seated in his nondescript office in Alwarpet, Chennai. In attendance would be the likes of Texas Pacific Group, Bessemer Venture Partners, Citicorp Finance, Cambridge Place Investment and Merrill Lynch (now part of Bank of America).
Sixteen private equity (PE) funds have, in recent years, made 25 separate equity investments across Shriram companies, cumulatively pumping in about Rs 1,936 crore (See table).
Interestingly, none of these institutional investors would have Thyagarajan’s mobile number—because the man simply refuses to carry one. The 73-year-old group Chairman doesn’t use spreadsheets or make earnings forecasts either. In fact, he even says that none of his group companies work with a business model. Thyagarajan is rustic, down-to-earth, brutally frank (with investors) and certainly not the sort to throw big lunches for PE investors. And yet, the Shriram Group has more PE funds invested in it than perhaps any other business group in the country. The funds have largely flown into its truck finance, consumer finance, and realty businesses.
So what is it about the group that PE funds find so attractive? Thyagarajan has a simple answer: "We aren’t focussing all the time on what our share (of the equity) should be. That’s because there isn’t a promoter family or anything like that behind the group." Moreover, he adds, the group is transparent.
But beneath this simple synopsis is a seasoned group of companies, with businesses in tough-to-copy markets, home-grown talent and, interestingly, a management culture that’s native. The icing on the cake, however, is how Shriram creates wealth for investors. Over the short-term, not all investments have been rewarding, but over the long-term, Shriram has been a terrific wealth creator. So, if one had invested Rs 64 crore to buy four million shares of Shriram City Union Finance in December 2006, those shares would be worth Rs 139 crore (as of November 28) despite the hit the market has taken. Mauritius-based ChrysCapital, which manages $2.25 billion in capital, did exactly that with its Van Gogh Fund. In fact, the investor bought two million additional shares in between.
Then, there were media reports last year about ChrysCapital making a partial exit from Shriram EPC, an engineering, design and construction company in the renewable energy space, taking back returns that were four times its investment. This was before Shriram EPC’s initial public offering. Another of its funds, Uno Investments, put out about Rs 120 crore in February 2005 for a slice (about 36 million shares) of Shriram Transport Finance. Now, its holding of about 31 million shares (Uno sold a small part of its holding in between) is worth about Rs 708 crore (as of November 28).
Comeback group
All this would have been unimaginable a decade ago. In 1998, Shriram was just another non-banking financial company (NBFC) fighting for its very survival. Back then, NBFC was a bad word as many fly-by-night operators promised the moon and made off with investors’ money. The Reserve Bank of India (RBI) cracked the whip in response, issuing stringent norms for NBFCs. The whole industry was caught in a quagmire, and Shriram, which had established its name in chit funds and in financing second-hand trucks, was feeling the heat.
"Managing our reputation became our biggest challenge," recalls Akhila Srinivasan, a Shriram veteran who now runs the insurance business. "Our best strengths came out of that crisis." Shriram not only managed to survive and diversify, but also got a vote of confidence from investors like never before. Since March 2004, its financing businesses alone have seen investments by a dozen PE players.
Forget 1998; such interest from PE investors would have been unimaginable even in the early part of this decade, when Shriram started managing truck loans on behalf of Citicorp Finance and UTI Bank (now Axis Bank). It was unthinkable even when Srinivasan decided to make a cold call to persuade FMO, a development finance organisation in Netherlands, to lend Shriram some funds. Those days, FMO extended loans to only a few Indian companies. Srinivasan flew down to Amsterdam, and convinced FMO to lend Shriram Rs 60 crore during the first meeting itself. Thereafter, it didn’t take much time for FMO to come in as an investor.
Arun Duggal has seen the shift in perception about Shriram from different vantage points. Now the Chairman of the board at four group companies, including Shriram Transport Finance and Shriram City Union, Duggal’s earlier job as head of Bank of America’s Indian operations between 1998 and 2001 put him in touch with PE firms. Later, when he advised them on their investment strategies, he found it wasn’t easy to make a pitch about Shriram. "The group was unknown to many. And NBFCs were shunned," he says. The group today manages Rs 27,000 crore of assets, compared to about Rs 1,000 crore in 1998.
Calling card
By the time Frontline Strategy, a Mauritius-based organisation known for its investments in Cbay Systems and Titagarh Wagons, injected an undisclosed amount into Shriram Strategic Engineering Private Ltd (SEPL) Composites for a 26% stake in June this year, the Shriram name had been firmly established on the PE radar.
Now, as K Ramakrishnan, Executive Director & Head (Investment Banking) of Chennai-based investment bank Spark Capital, says: "The group has become a darling of PE investors. More often than not, even without hiring an investment banker and running a formal process, it has been able to attract best-in-breed investors."
"After 2002-03, we have been comfortable," says Thyagarajan. "We have not been desperate for private equity funds." They have flowed in nonetheless, as is evident from the extent of capital PE players have poured into Shriram. Take, for example, the 22-year-old Shriram City Union Finance, which is in the business of retail loans. PE investors and FIIs hold 42% in it directly. In addition, in September this year, the Texas Pacific Group (TPG) invested Rs 530 crore for a 49% stake in Shriram Retail Holdings, Shriram City Union’s holding company. "The market opportunity in SME/personal loans is compelling," says Puneet Bhatia, Managing Director of TPG India, which has stakes in the holding companies of two group companies. "And the group is well positioned to harness it," he adds. TPG globally manages about $50 billion of capital.
It was as Newbridge that TPG first invested in a Shriram company (the holding company of the transport finance business). It paved the way for a second investment more than two years later. Says Bhatia: "Having seen the group from the inside helped convince us on the attractiveness of partnering again for a different arm." This time, it was in the holding company of the consumer finance business.
The initial trickle, the gradual build-up and the current flood of PE investments have a meaning, according to R Sridhar, MD of Shriram Transport Finance Corporation. "It has been about building credibility," he explains. The transport finance business was the group’s initial calling card among investors. "The business model of the used-trucks business is strong," says Ravi Bahl, MD of ChrysCapital. Shriram has, over the years, managed to create a market for used-truck loans among low-income groups, which organised financial institutions consider risky and therefore avoid. By working out a method to assess the value of used trucks, building relationships with clients and getting back the monies, Shriram has cornered 25% of a market that is largely unorganised. The margins are also higher on loans for used trucks than for new ones. "We fund credit-starved small-truck owners," says Sridhar. "It is normally considered a complex and difficult segment."
It’s the people
Thyagarajan, atypical of a corporate, seems allergic to the word ‘business model’."I wouldn’t like to use that term," he says. "The important thing is to run the business well. Once we do well, others will start seeing a model in what we do." But he does agree that PE investors want to see your business model, and more importantly, how you run it. Shriram seems to have the people to run it, despite avoiding the popular routes to getting talent. "It has grown with home-grown leaders, and has generally stayed away from high-profile recruitments," says Spark’s Ramakrishnan, who has observed the group for 15 years and facilitated many of its PE deals. Just take a look at its current set of leaders: Sridhar has been with Shriram since 1985; Srinivasan joined the group in 1986; and Subhasri Sriram, Executive Director of Shriram City Union Finance, made her entry in 1991.
"The branch manager is given all freedom to make mistakes and evolve," says Srinivasan, who started off her career at Shriram as a management trainee. "A person who started as a clerk is now the chief of the chit funds business in Andhra Pradesh," she says proudly. Interestingly, as Duggal says, this has happened even though the group doesn’t believe in pampering employees with too much money. It manages to retain employees by offering them stock options and challenging assignments. "Shriram doesn’t stereotype people," says Subhasri Sriram. "I have been in accounts, finance and then in operations." She says her company has seen near-zero attrition in the last year. Shriram isn’t a place populated with suited-booted, English-speaking managers. But you can trust the group to come up with interesting solutions—for instance, the person disbursing money at the branch level is also responsible for getting EMIs back on time!
"The people at Shriram do not believe in doing business with spreadsheets," says Bahl, referring to its native style of management. The belief is that you can trust a highly involved and empowered team, shorn of all paraphernalia, to deliver the goods. Until now, that belief has paid off.
The PE connect
In June this year, something happened against the run of play. A potential PE deal was called off. Goldman Sachs had initially proposed to invest Rs 300 crore for a 20% share in Shriram Credit, which is into equity and commodity trading. It didn’t come through. "They didn’t give us a final no, but there was foot-dragging," says Thyagarajan. "We didn’t want to embarrass them."
"We believe in partnerships," says Duggal, "and we go out of the way to build them." One instance of that was how Shriram Properties, the group’s realty company, zeroed in on a PE investor for a Rs 1,800 crore project near Chennai. "We gave our word to Sun Apollo," says Shriram Properties Managing Director M Murali. The deal hadn’t been signed, and Sun Apollo took some time to pay. Meanwhile, two other PE investors showed interest, and bid higher than Sun Apollo’s. Shriram Properties didn’t take those, and instead waited for Sun Apollo to invest. Sun Apollo has since invested in two more of Shriram’s projects.
Shriram Properties seems to have literally gone out of its way for a PE investor when it deferred its IPO plans last year. The realty firm was about to file for an IPO when Walton Street asked if it would consider an investment rather than go for an IPO. Shriram Properties obliged. "We would have got the funds from the IPO in five to six months. We got it from Walton Street in two months," says Murali.
Having said that, PEs do form an important cog in the Shriram growth wheel. A finance-based business could do well to have more investment in equity, as more capital is a pre-requisite to borrow more. "In NBFCs, growing without capital isn’t possible," says Subhasri Sriram. "And the intangible benefits have been the confidence of the employees and investors’ ideas."
Choosing and managing
It’s a general perception that PE firms come in with a target rate of return in mind. On the other hand, Thyagarajan says in negotiations with PE firms that he’s more interested in talking about Shriram’s track-record than about future projections. Interestingly, observers say, those seemingly parallel lines of thought don’t seem to matter.
Thyagarajan says: "PE firms also understand there can be no guarantee of returns. They say they will get into a venture only if they get 30% IRR (internal rate of return). I understand that’s how they should take decisions." And then: "We don’t guarantee them anything. We only say what we have done in the past. Whether you think it would give you the return or not is your decision."
TPG’s Bhatia says he had to be convinced of both the track-record and the features that would drive future success. "The group’s and our approach converged on these aspects, and this is somewhat rare."
Over the years, Duggal says, the group has consciously allied with PE firms with compatible values and investment horizons. "Our preference is not to go with PE firms that are control-oriented. We want partners who can support our business," Duggal adds. He goes on: "We can’t work much with hedge funds. Their investment horizon is short." It is no wonder then that Frontline Strategy’s shortest investment span till date has been four-and-a-half years (it has invested in Shriram SEPL). "We have even stayed invested in some for over six years," says Supratim Basu, Director at Frontline Strategy.
Then, the good old idea of clear communication takes over. Potential conflicts are nipped in the bud. "I think we have never been obsessed with capital markets," Subhasri Sriram states as an example. "There have been times when we were undervalued. That didn’t worry us. We were only concerned about doing what we needed to do. And we have communicated to the PE firms that this is what we always stand for." ChrysCapital’s Bahl agrees with him: "There has been good information sharing and transparency."
Thyagarajan knows a thing or two about how to handle things even when they don’t agree. "If I say my method is the best method and they say it is not, I would say, ‘okay let’s follow what you say, and let’s see if you are on the right path,’" he says.
But the most important thing is that the roles of PE investors are clearly defined. "We have agreed on what we do and what they do, and we go by that," says Sridhar. In the case of the transport finance business, which Sridhar heads, ChrysCapital’s job is at the board level, while TPG plays a more active role helping Shriram with its international resource network. "PEs don’t bring in any culture," says Sridhar. "At the end of the day, it’s Shriram’s culture."
Why private equity loves this man?
Shriram Group Chairman R Thyagarajan has a way of attracting and keeping PE firms happy. At last count, he had 25 investments in 7 group firms
Sriram Srinivasan
If R Thyagarajan, Chairman of the Rs 5,000-crore Shriram Group, calls a meeting of all institutional investors with stakes in his companies, he would have representatives from most of Wall Street’s big names seated in his nondescript office in Alwarpet, Chennai. In attendance would be the likes of Texas Pacific Group, Bessemer Venture Partners, Citicorp Finance, Cambridge Place Investment and Merrill Lynch (now part of Bank of America).
Sixteen private equity (PE) funds have, in recent years, made 25 separate equity investments across Shriram companies, cumulatively pumping in about Rs 1,936 crore (See table).
Interestingly, none of these institutional investors would have Thyagarajan’s mobile number—because the man simply refuses to carry one. The 73-year-old group Chairman doesn’t use spreadsheets or make earnings forecasts either. In fact, he even says that none of his group companies work with a business model. Thyagarajan is rustic, down-to-earth, brutally frank (with investors) and certainly not the sort to throw big lunches for PE investors. And yet, the Shriram Group has more PE funds invested in it than perhaps any other business group in the country. The funds have largely flown into its truck finance, consumer finance, and realty businesses.
So what is it about the group that PE funds find so attractive? Thyagarajan has a simple answer: "We aren’t focussing all the time on what our share (of the equity) should be. That’s because there isn’t a promoter family or anything like that behind the group." Moreover, he adds, the group is transparent.
But beneath this simple synopsis is a seasoned group of companies, with businesses in tough-to-copy markets, home-grown talent and, interestingly, a management culture that’s native. The icing on the cake, however, is how Shriram creates wealth for investors. Over the short-term, not all investments have been rewarding, but over the long-term, Shriram has been a terrific wealth creator. So, if one had invested Rs 64 crore to buy four million shares of Shriram City Union Finance in December 2006, those shares would be worth Rs 139 crore (as of November 28) despite the hit the market has taken. Mauritius-based ChrysCapital, which manages $2.25 billion in capital, did exactly that with its Van Gogh Fund. In fact, the investor bought two million additional shares in between.
Then, there were media reports last year about ChrysCapital making a partial exit from Shriram EPC, an engineering, design and construction company in the renewable energy space, taking back returns that were four times its investment. This was before Shriram EPC’s initial public offering. Another of its funds, Uno Investments, put out about Rs 120 crore in February 2005 for a slice (about 36 million shares) of Shriram Transport Finance. Now, its holding of about 31 million shares (Uno sold a small part of its holding in between) is worth about Rs 708 crore (as of November 28).
Comeback group
All this would have been unimaginable a decade ago. In 1998, Shriram was just another non-banking financial company (NBFC) fighting for its very survival. Back then, NBFC was a bad word as many fly-by-night operators promised the moon and made off with investors’ money. The Reserve Bank of India (RBI) cracked the whip in response, issuing stringent norms for NBFCs. The whole industry was caught in a quagmire, and Shriram, which had established its name in chit funds and in financing second-hand trucks, was feeling the heat.
"Managing our reputation became our biggest challenge," recalls Akhila Srinivasan, a Shriram veteran who now runs the insurance business. "Our best strengths came out of that crisis." Shriram not only managed to survive and diversify, but also got a vote of confidence from investors like never before. Since March 2004, its financing businesses alone have seen investments by a dozen PE players.
Forget 1998; such interest from PE investors would have been unimaginable even in the early part of this decade, when Shriram started managing truck loans on behalf of Citicorp Finance and UTI Bank (now Axis Bank). It was unthinkable even when Srinivasan decided to make a cold call to persuade FMO, a development finance organisation in Netherlands, to lend Shriram some funds. Those days, FMO extended loans to only a few Indian companies. Srinivasan flew down to Amsterdam, and convinced FMO to lend Shriram Rs 60 crore during the first meeting itself. Thereafter, it didn’t take much time for FMO to come in as an investor.
Arun Duggal has seen the shift in perception about Shriram from different vantage points. Now the Chairman of the board at four group companies, including Shriram Transport Finance and Shriram City Union, Duggal’s earlier job as head of Bank of America’s Indian operations between 1998 and 2001 put him in touch with PE firms. Later, when he advised them on their investment strategies, he found it wasn’t easy to make a pitch about Shriram. "The group was unknown to many. And NBFCs were shunned," he says. The group today manages Rs 27,000 crore of assets, compared to about Rs 1,000 crore in 1998.
Calling card
By the time Frontline Strategy, a Mauritius-based organisation known for its investments in Cbay Systems and Titagarh Wagons, injected an undisclosed amount into Shriram Strategic Engineering Private Ltd (SEPL) Composites for a 26% stake in June this year, the Shriram name had been firmly established on the PE radar.
Now, as K Ramakrishnan, Executive Director & Head (Investment Banking) of Chennai-based investment bank Spark Capital, says: "The group has become a darling of PE investors. More often than not, even without hiring an investment banker and running a formal process, it has been able to attract best-in-breed investors."
"After 2002-03, we have been comfortable," says Thyagarajan. "We have not been desperate for private equity funds." They have flowed in nonetheless, as is evident from the extent of capital PE players have poured into Shriram. Take, for example, the 22-year-old Shriram City Union Finance, which is in the business of retail loans. PE investors and FIIs hold 42% in it directly. In addition, in September this year, the Texas Pacific Group (TPG) invested Rs 530 crore for a 49% stake in Shriram Retail Holdings, Shriram City Union’s holding company. "The market opportunity in SME/personal loans is compelling," says Puneet Bhatia, Managing Director of TPG India, which has stakes in the holding companies of two group companies. "And the group is well positioned to harness it," he adds. TPG globally manages about $50 billion of capital.
It was as Newbridge that TPG first invested in a Shriram company (the holding company of the transport finance business). It paved the way for a second investment more than two years later. Says Bhatia: "Having seen the group from the inside helped convince us on the attractiveness of partnering again for a different arm." This time, it was in the holding company of the consumer finance business.
The initial trickle, the gradual build-up and the current flood of PE investments have a meaning, according to R Sridhar, MD of Shriram Transport Finance Corporation. "It has been about building credibility," he explains. The transport finance business was the group’s initial calling card among investors. "The business model of the used-trucks business is strong," says Ravi Bahl, MD of ChrysCapital. Shriram has, over the years, managed to create a market for used-truck loans among low-income groups, which organised financial institutions consider risky and therefore avoid. By working out a method to assess the value of used trucks, building relationships with clients and getting back the monies, Shriram has cornered 25% of a market that is largely unorganised. The margins are also higher on loans for used trucks than for new ones. "We fund credit-starved small-truck owners," says Sridhar. "It is normally considered a complex and difficult segment."
It’s the people
Thyagarajan, atypical of a corporate, seems allergic to the word ‘business model’."I wouldn’t like to use that term," he says. "The important thing is to run the business well. Once we do well, others will start seeing a model in what we do." But he does agree that PE investors want to see your business model, and more importantly, how you run it. Shriram seems to have the people to run it, despite avoiding the popular routes to getting talent. "It has grown with home-grown leaders, and has generally stayed away from high-profile recruitments," says Spark’s Ramakrishnan, who has observed the group for 15 years and facilitated many of its PE deals. Just take a look at its current set of leaders: Sridhar has been with Shriram since 1985; Srinivasan joined the group in 1986; and Subhasri Sriram, Executive Director of Shriram City Union Finance, made her entry in 1991.
"The branch manager is given all freedom to make mistakes and evolve," says Srinivasan, who started off her career at Shriram as a management trainee. "A person who started as a clerk is now the chief of the chit funds business in Andhra Pradesh," she says proudly. Interestingly, as Duggal says, this has happened even though the group doesn’t believe in pampering employees with too much money. It manages to retain employees by offering them stock options and challenging assignments. "Shriram doesn’t stereotype people," says Subhasri Sriram. "I have been in accounts, finance and then in operations." She says her company has seen near-zero attrition in the last year. Shriram isn’t a place populated with suited-booted, English-speaking managers. But you can trust the group to come up with interesting solutions—for instance, the person disbursing money at the branch level is also responsible for getting EMIs back on time!
"The people at Shriram do not believe in doing business with spreadsheets," says Bahl, referring to its native style of management. The belief is that you can trust a highly involved and empowered team, shorn of all paraphernalia, to deliver the goods. Until now, that belief has paid off.
The PE connect
In June this year, something happened against the run of play. A potential PE deal was called off. Goldman Sachs had initially proposed to invest Rs 300 crore for a 20% share in Shriram Credit, which is into equity and commodity trading. It didn’t come through. "They didn’t give us a final no, but there was foot-dragging," says Thyagarajan. "We didn’t want to embarrass them."
"We believe in partnerships," says Duggal, "and we go out of the way to build them." One instance of that was how Shriram Properties, the group’s realty company, zeroed in on a PE investor for a Rs 1,800 crore project near Chennai. "We gave our word to Sun Apollo," says Shriram Properties Managing Director M Murali. The deal hadn’t been signed, and Sun Apollo took some time to pay. Meanwhile, two other PE investors showed interest, and bid higher than Sun Apollo’s. Shriram Properties didn’t take those, and instead waited for Sun Apollo to invest. Sun Apollo has since invested in two more of Shriram’s projects.
Shriram Properties seems to have literally gone out of its way for a PE investor when it deferred its IPO plans last year. The realty firm was about to file for an IPO when Walton Street asked if it would consider an investment rather than go for an IPO. Shriram Properties obliged. "We would have got the funds from the IPO in five to six months. We got it from Walton Street in two months," says Murali.
Having said that, PEs do form an important cog in the Shriram growth wheel. A finance-based business could do well to have more investment in equity, as more capital is a pre-requisite to borrow more. "In NBFCs, growing without capital isn’t possible," says Subhasri Sriram. "And the intangible benefits have been the confidence of the employees and investors’ ideas."
Choosing and managing
It’s a general perception that PE firms come in with a target rate of return in mind. On the other hand, Thyagarajan says in negotiations with PE firms that he’s more interested in talking about Shriram’s track-record than about future projections. Interestingly, observers say, those seemingly parallel lines of thought don’t seem to matter.
Thyagarajan says: "PE firms also understand there can be no guarantee of returns. They say they will get into a venture only if they get 30% IRR (internal rate of return). I understand that’s how they should take decisions." And then: "We don’t guarantee them anything. We only say what we have done in the past. Whether you think it would give you the return or not is your decision."
TPG’s Bhatia says he had to be convinced of both the track-record and the features that would drive future success. "The group’s and our approach converged on these aspects, and this is somewhat rare."
Over the years, Duggal says, the group has consciously allied with PE firms with compatible values and investment horizons. "Our preference is not to go with PE firms that are control-oriented. We want partners who can support our business," Duggal adds. He goes on: "We can’t work much with hedge funds. Their investment horizon is short." It is no wonder then that Frontline Strategy’s shortest investment span till date has been four-and-a-half years (it has invested in Shriram SEPL). "We have even stayed invested in some for over six years," says Supratim Basu, Director at Frontline Strategy.
Then, the good old idea of clear communication takes over. Potential conflicts are nipped in the bud. "I think we have never been obsessed with capital markets," Subhasri Sriram states as an example. "There have been times when we were undervalued. That didn’t worry us. We were only concerned about doing what we needed to do. And we have communicated to the PE firms that this is what we always stand for." ChrysCapital’s Bahl agrees with him: "There has been good information sharing and transparency."
Thyagarajan knows a thing or two about how to handle things even when they don’t agree. "If I say my method is the best method and they say it is not, I would say, ‘okay let’s follow what you say, and let’s see if you are on the right path,’" he says.
But the most important thing is that the roles of PE investors are clearly defined. "We have agreed on what we do and what they do, and we go by that," says Sridhar. In the case of the transport finance business, which Sridhar heads, ChrysCapital’s job is at the board level, while TPG plays a more active role helping Shriram with its international resource network. "PEs don’t bring in any culture," says Sridhar. "At the end of the day, it’s Shriram’s culture."
1 comments:
Shriram Group of finance sucks....
They scam customers with high interest rates..
And managers wont give any agreement papers to customers...
If you ask them they say some bullshit.
It sucks man....
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