“We believe there are a lot of opportunities to invest in Tier-2 and Tier-3 cities,” says Vishal Tulsyan, CEO and Managing Director, Motilal Oswal Private Equity Advisors Pvt Ltd.

Nearly half the first fund, says Tulsyan, was invested in the smaller cities, in businesses such as financial services, food and infrastructure service providers. “Our experience has been great with these companies in terms of corporate governance, willingness (to learn) and the integrity with which they have been conducting their business,” says Tulsyan. It also likes to invest in first-generation entrepreneurs who have the fire and the passion to succeed.

Motilal Oswal Private Equity Advisors manages three funds totalling Rs 1,500 crore. The first fund of Rs 550 crore has been fully invested and has sold its stake in three companies in which it had invested; the company hopes to exit all its investments in the first fund by the end of this financial year. It has started investing from the second fund of Rs 750 crore. It also has a Rs 200-crore real estate fund, from which it invests predominantly in residential projects in Mumbai, Pune and Bangalore.

Investment strategy

On the company’s investment strategy, Tulsyan says, “We are very clear, and it’s something that we have practised from the beginning, that we will invest only in businesses that we understand.” Unlike other funds that got swayed by the technology sector, Motilal Oswal PE is clear that it will not follow the herd and invest in technology or tech-oriented companies.

“I need to do things which are within my circle of competence. The moment I try and go outside my circle of competence, I will be headed for a disaster,” explains Tulsyan.

Typically, Motilal Oswal PE invests Rs 50-100 crore in the companies and picks up a 15-30 per cent stake. It looks to invest in businesses that have reached a certain size and need funds to grow to the next level. One of the unwritten rules is that it will invest in companies with a minimum profit after tax of more than Rs 10 crore in the preceding four quarters. And one which would have paid at least Rs 5 crore as income tax. On the three exits it has had so far, Tulsyan says the returns have been more than 40 per cent IRR (internal rate of return). Tulsyan recalls that in 2006-07, when the firm raised its first fund, the tailwinds ensured that it could raise the money without a track record. However, soon after raising the money, Motilal Oswal PE realised the market was going crazy in terms of valuations. “There were exciting businesses, great businessmen, but the valuation expectations were going crazy,” Tulsyan says. That is when the firm realised it had to do more structured deals – ones where its investment was protected in terms of an assured IRR at the time of an exit. Once the market stabilised, it did fewer structured deals and more direct equity investing.

What would be his advice to entrepreneurs looking to approach PE firms for funds? “It is as much important for them to analyse us as it is for us to analyse them,” says Tulsyan. PE firms have to analyse the companies because they are putting in money. The entrepreneurs need to analyse the PE firms because “they are allowing us to sit on their board, they are giving us a lot of rights, lot of control rights”. Entrepreneurs will have to be open to that idea. That, till now they have been running the company as their own and the day they sell equity, it is no longer theirs alone.

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